The CGT exemption that is available for the sale of an inherited home within two years of the deceased’s death under s 118-195 of the ITAA 1997 is invaluable. Furthermore, an extension of this period can be sought directly from the Commissioner or self-assessed under the “safe-harbour rules” in PCG 2019/5.

However, it should not be forgotten that if a full CGT exemption is not available under the rules in s 118-195, then a partial exemption automatically applies under the calculation rules in s 118-200 (and following). Importantly, these partial exemption rules include the often over-looked partial exemption rule in s 118-205 that applies to a “previously inherited dwelling”.

This rule provides that if a partial exemption applies to a post-CGT dwelling (for example, it is not sold within two years of the deceased’s death) and the dwelling was previously inherited by the “most recently deceased” person, then account must also be taken of the “prior deceased’s” non-main residence days (that is, the days the prior deceased did not occupy the dwelling as their main residence).

In other words, the periods during which the dwelling did not qualify as a main residence during both the “last inheritance” and any “prior inheritance/s” are taken into account as non-main residence days for the purposes of the partial exemption calculation.

This in turn means (as stated in a note to s 118-205(1)) that this partial exemption rule applies to a “chain of inheritances”. But note that this partial exemption rule only applies to dwellings acquired by a trustee or beneficiary after 20 August 1996.

Nevertheless, despite the apparent harshness of this partial exemption rule, there is the powerful ameliorating “concession” in s 118-200(4) (which applies to all inherited dwellings subject to a CGT partial exemption). It provides that if a dwelling was “the main residence of a deceased at their date of death and was not then being used to produce assessable income” (or is deemed to be such by way of using the absence concession), then any “non-main residence days” during that deceased’s ownership period are ignored.

This is highly significant in any partial exemption calculation for a previously inherited dwelling, because it means if this condition is met then any non-main residence days of a prior deceased can be ignored in the calculation!

Finally, if all this seems confusing and you are confronted with such an issue, you can always just “mechanically” apply the calculation rules in s 118-205 without really having to “understand” them — but always keeping in mind the significance and concessional effect of s 118-200(4).