Joint Tenancy problem avoided by becoming a Rental

Question

My query is about CGT on my late mother’s home, which will be listed for sale in July this year.

Background

My parents bought their home in January 1991 for $165,000.
My mother was moved into a high-care aged facility in early 2010 where she continued to live until her death in May 2025 (no RAD was paid).
My father continued living in their home until his death in late 2010.
The home was rented through a local real estate agent from January 2012 to April 2026.
All tax returns have been lodged, including the 2024/2025 tax year.
The home has been retrospectively valued as at January 2012 for $385,000.
The Executors (my sister and I) hope to sell the home for approximately $850,000.

My Questions

Does the “six year rule” apply? and
Do we gather records for CGT purposes from January 1991, or 2012, or 2018, and what do we include in these records?
Do we include expenses already claimed during the 14 year rental period?

Your advice would be greatly appreciated.

Clarifying Question from Julia

Do you know if your parents owned it as joint tenants or tenants in common? Have a think back to when your father died. Did you have to go through probate to transfer the house into your mothers name or was it just automatic because they were joint tenants?

Additional Information Provided

My parents were joint tenants and probate was NOT necessary when my father died.

Answer

As the property was not owned as tenants in common there is no reset of your fathers cost base to market value on his death. Reference section 128-50 vs 128-15 ITAA 1997. Fortunately, the fact that you rented it out within 2 years of death will get us a reset to market value.

The best way to look at this is as if there are two different assets, half the house each. Even though they both ended up being owned by your mum we will call them dad’s half and mum’s half in reference to the way they were originally owned.

Dad’s half

The problem with joint tenancy instead of tenants in common is that when your father died your mother steps into his shoes, his cost base and treated as he treated it ie main residence exemption. Even though it was his home at DOD there is no reset to market value. I assume that the whole time Dad owned this half it was covered with his main residence exemption. Further, as it was his home at DOD it can continue to be covered by his main residence exemption for 2 years after death, reference section 118-195. During this time it was rented out for the first time so section 118-192 resets the cost base to market value at that time. Which is a huge relief can you imagine going right back to 1991! So we start with half of the $385,000 we can add to this half of any costs not otherwise claimed as a tax deduction from the Jan 2012 reset date. Obviously most of the costs will have been claimed against the rent but now it is vacant consider holding costs such as insurance, rates, repairs and maintenance, also add in selling costs and any improvements since 2012. If you have been claiming any Div 43 building depreciation that will have to be added back now to reduce the cost base as the deemed acquisition date has changed from 1991 to 2012. Hopefully, as it has been part of the estate for all those years you will have the records.

Mum’s half

She has owned it since 1991 and lived there until early 2010. From that point onwards she can use section 118-145 to continue to cover it with her main residence exemption infinitely if it is not earning income or for 6 years if it is. So the 6 year clock starts in January 2012 through to January 2018 when it starts to be exposed to CGT. Because this half was still being covered by your mother’s main residence exemption when it was first rented out, it also gets the resetting of the cost base to half of the $385,000 at January 2012. This section 118-192 also resets the acquisition date. The difference here but is it continued to be covered by your mother’s main residence exemption for 6 years because she was still alive. Let’s assume you sell in January 2027 to keep it simple. The actual calculation is done on a daily basis. You work out the capital gain since January 2012 just the same as for Dad’s half. Let’s say it is $100,000. From January 2012 to January 2027 is 15 years, 6 of which are covered with her main residence exemption. $100,000/15×9= $60,000 of the gain is exposed to tax, assuming no capital losses, then apply the 50% CGT discount so $30,000 taxable.

A couple of points just in case you think I might have missed them:

As your mother was not living in the house when your father died i.e. when Dad’s half became hers she cannot use section 118-145 to cover it with her main residence exemption the way she did on Mum’s half that is because she never lived in Dad’s half as her home, after she became the owner of Dad’s half. Living there is necessary before the main residence exemption can start.
Unlike the 6 year continuing coverage with her main residence exemption that section 118-145 provides. The 2 years on death rule section 118-195 disappears if the property is not sold within those 2 years, it reverts back to the date of death. Luckily, it is accepted that if during that 2 year period the reset is triggered under section 118-192 when it is first used to produce income, that stays with the property even though the main residence exemption is now lost at DOD.

The bottom line is, thank God, you rented the property out before the main residence exemptions were lost. If you hadn’t you would not have qualified for the reset and the CGT calculation would have been a lot of hard work. Nevertheless, you do have a bit of a task in front of you. I attach the Protecting Your Home from CGT spreadsheet that I hope will be helpful. The capital gain will be the same for both sides of the house it is just the percentage of the gain that is subject to CGT that will be different.

Thank you for allowing your Q&A to be published, hopefully it will be a warning to a lot of people on how joint tenancy can create a CGT nightmare. You are just lucky it was rented out!

Please note this answer is limited by the information you have provided and should not be relied upon without further professional advice on your particular circumstances.