Inherited Property Exceeding 2 Hectares and Capital Gains Tax
One of the most common questions in practice is what happens with inherited property exceeding 2 hectares — especially when the family inherits a small acreage rather than a standard suburban block.
We’ve covered related issues such as ATO hardship provisions in earlier Weekly Taxation Stories, but the rules for land size are unique.
The answer lies in the capital gains tax (CGT) provisions surrounding the main residence exemption and the two-hectare rule.
The Two-Hectare Rule
Under Australian tax law, the main residence exemption can shield the family home from CGT. However, this exemption only extends to two hectares (about 4.94 acres) of land surrounding the dwelling.
-
The house and up to two hectares: CGT-free.
-
Any land in excess of two hectares: subject to CGT.
This distinction is critical for families inheriting property exceeding 2 hectares.
Which CGT Event Applies?
The relevant CGT event is CGT event A1 (disposal of a CGT asset).
-
Transfer from deceased to beneficiary: no immediate CGT.
-
Beneficiary acquires property at deceased’s date of death.
The cost base depends on whether the property was acquired before or after 20 September 1985.
The 20 September 1985 Rule
-
Pre-20 September 1985 acquisition: Property was pre-CGT. Beneficiary inherits at market value at date of death.
-
Post-20 September 1985 acquisition: Beneficiary inherits the deceased’s cost base.
This date remains one of the most important thresholds in Australian tax law.
How CGT is Calculated on Inherited Property Exceeding 2 Hectares
When the beneficiary sells the property:
-
House + 2 hectares → may qualify for full CGT exemption.
-
Excess land beyond 2 hectares → subject to CGT.
If the property is sold more than two years after death, additional conditions apply. In some cases, the Commissioner may grant an extension to preserve the exemption.
Practical Example
Imagine a family property of 5 acres:
-
Deceased lived in the home.
-
Land was owned in personal name.
-
Property acquired post-1985.
On death, the property passes to their daughter.
When sold:
-
2 hectares (just under 5 acres) → exempt.
-
Excess land (approx. 0.15 acres) → subject to CGT.
The sale proceeds are apportioned between exempt and taxable land on a reasonable basis.
Key Takeaway
The main residence exemption is powerful but capped at two hectares. Families inheriting property exceeding 2 hectares must recognise that the excess land is exposed to CGT.
Getting the cost base right and applying the 20 September 1985 rule ensures the tax outcome is properly managed.
For more context on property tax and inheritance, see our earlier article on ATO hardship provisions.
You can also read the ATO’s official guidance on the main residence exemption for further detail.