The ATO has released a draft ruling, TD 2026/D1, that changes how inherited homes are treated for capital gains tax (CGT). The new guidance is stricter than many families and their advisers expect. For some, it is a sign that their estate plan may not work the way they think.

How CGT normally works when someone dies

When a person dies, their home passes to their estate. CGT is not triggered straight away. Instead, it is deferred. The estate or beneficiaries may still be able to sell the property CGT-free, but only if specific conditions are met:

• Sell within two years of death: The ATO can sometimes extend this deadline, but it is not guaranteed.
• A qualifying person lives there continuously: The property must be used as the main residence of a qualifying person from the date of death until the sale. Qualifying people include the surviving spouse, the beneficiary selling the property, or someone with a right to occupy the home under the will.
  

What the new ruling changes

The ATO's draft ruling focuses on that third category: a person with "a right to occupy the dwelling under the will".

The ATO's new position is that this right must be:

• Explicitly stated in the will itself.
• Granted to a specific, named individual.

The following arrangements do NOT meet this standard, according to the ATO:

• A will that gives the executor discretion to let a family member live in the property.
• A testamentary trust where the trustee allows a beneficiary to occupy the home.
• Informal family agreements made outside the will, even if followed consistently.

A testamentary trust is a trust created by a will that takes effect when a person dies. They are often used to hold assets for family members, including the family home. Under the ATO's new guidance, holding the property in a testamentary trust does not qualify as a direct right to occupy under the will.

This matters because many estate plans use these kinds of arrangements. If they do not meet the ATO's standard, the CGT exemption may not apply.

What this could cost your family

Some legal and real estate experts warn this could force families to sell homes within two years of death to avoid CGT, especially in high-value areas.

Consider this: inheriting a $2 million home with a capital gain of $1.5 million could expose the beneficiaries to $300,000–$600,000 in tax, depending on discounts and tax brackets.

However, it is important to remember that there are still other ways for the sale of the property to qualify for a full exemption. 

That is money that could otherwise pass to the next generation. The risk is highest for families holding long-held properties in major cities.

Who should review their situation now

TD 2026/D1 is still in draft form and may change. But it reflects the ATO's current thinking and should be taken seriously. You should review your situation if:

• Your will leaves property to your estate without naming a specific person with the right to occupy it.
• You have inherited a property and are living in it under an informal arrangement or through a testamentary trust.
• Your estate plan relies heavily on a testamentary trust for holding or distributing property.
• You are an executor dealing with an estate where the two-year window is approaching.

What to do now

Review your will with your solicitor and your accountant. If you want a specific person to be able to live in a property after you pass away, that right needs to be stated clearly in the will, naming the person directly. We can work with your estate planning solicitor to make sure the tax consequences are properly addressed.

Please contact us if you have any questions - email us or phone our team on 02 9899 3044.