When someone dies owning their home, the estate or a trustee often holds the property for a period before sale or transfer. In many cases, a family member keeps living in the home during that time. The capital gains tax (CGT) main residence exemption can exempt or reduce the CGT on a later sale of that home by the estate or trustee. One condition that may be relevant for a full exemption requires that, from the date of death until sale, the home is the main residence of someone who has a “right to occupy the dwelling under the deceased’s will”.
The ATO’s draft Taxation Determination TD 2026/D1 explains how the ATO will interpret that phrase. The draft Determination adopts a narrow view, so you need to plan carefully if you want a family member to live in the home and still protect the CGT position with low risk with the ATO.
The draft Determination is currently set to be finalised and issued in late 2026.
Big picture: how the exemption works after death
Under income tax law, a dwelling that passes to a beneficiary or is held in a deceased estate can qualify for a full CGT main residence exemption if:
- the deceased used the property as their main residence and did not use it to produce assessable income (for post-1985 purchases); and
- from death until the estate or trustee sells or otherwise ends its ownership, the dwelling is the main residence for someone who has a right to occupy it under the will.
If you do not meet that right-to-occupy condition, the estate may still satisfy conditions for a full or a partial exemption, but you lose a very valuable pathway to a complete CGT exemption if the property is held for longer than 2 years following the deceased’s death.
What TD 2026/D1 says in simple terms
The draft Determination explains that:
- a “right to occupy” means a personal right to live in the home for a period of time;
- the right must arise directly under the terms of the will; and
- the will must clearly name or identify the person who holds that right.
The ATO will apply the term “under the deceased’s will” narrowly. You cannot treat general flexibility or family agreements as good enough. The right needs to appear in the will itself, in clear language that grants a right to live in the dwelling to a specific person.
Arrangements that usually do not qualify
TD 2026/D1 provides the following arrangements generally will not create a qualifying right to occupy:
- Separate agreements or deeds after death
If beneficiaries and the executor sign an agreement that allows one beneficiary to live in the home until sale, that agreement does not create a “right to occupy under the will”. The right comes from the agreement, not the will.
- Executor or trustee discretion
If the will gives the executor or trustee a broad discretion to permit any person to live in the home, and the executor later chooses one beneficiary, that person will not hold a right to occupy “under the will”. The will never expressly granted them that right.
- Rights under a testamentary trust deed
If the terms of testamentary trust (which by nature must be included as part of the Will) allow the trustee to grant occupation rights, that right will not be considered as a right under the will. The ATO treats the operative terms of the will and the testamentary trust as separate.
Arrangements that may qualify
- Family provision orders
If a court makes a family provision order that grants someone a right to live in the home, succession laws usually treat that order as if it amends the will (like a codicil). TD 2026/D1 accepts that this kind of order can create a qualifying “right to occupy under the will”.
- Limited-period rights
If the will grants a right to live in the home for a fixed period (for example, 18 months) and the person stays longer under a later agreement, this full exemption will not be available if the property is disposed of after the fixed period. After that, a partial exemption may be available.
Practical implications and examples
Example: a well-drafted clause
Lucille leaves her main residence to one of her sons, Byron, in her will. The clause under the will says:
“I give my son, Byron, the right to occupy and live in my main residence at 1 Balboa Street for so long as Byron wishes, and while Byron normally lives there as his main residence. After Byron’s right ends, he dies or otherwise permanently vacates the property, my executor must sell the home and divide the net sale proceeds between my children.”
Byron holds an express right to occupy the home under the will. If the other conditions for the main residence exemption are also met, the estate or trustee can dispose of the home after Byron leaves or dies and may disregard any capital gain.
A different outcome applies if Lucille’s spouse, George, was the person occupying the property. An exemption may be available where the dwelling was the main residence of the deceased’s spouse from the deceased’s death until the spouse’s ownership interest ends. In those circumstances, the tax legislation itself accommodates occupation by the surviving spouse and there is no need to rely on the ‘right to occupy’ requirement or consider TD 2026/D1.
Accordingly, while a will may still expressly grant a right of residence to the surviving spouse for succession planning or asset protection reasons, such a clause is generally not necessary to satisfy the CGT exemption requirements where the spouse continues to occupy the dwelling as their main residence.
Example: an informal agreement that creates CGT risk
Henry’s will directs the executor to sell the home and divide the proceeds equally between his three children. The will does not mention any right to live in the home. After Henry dies, the children agree that one child, Archie, can stay in the home for three years until he “feels ready” to sell.
Archie lives there as his main residence, but Archie does not hold a right to occupy under the will. The right arises only under the post-death agreement. When the executor finally sells the home, the estate may face CGT on part or all of the capital gain.
Example: testamentary trust risk
Theodore’s will leaves the home to a testamentary discretionary trust. The terms of the testamentary discretionary trust provide that the trustee may allow any beneficiary to live in the home rent-free. The terms of the testamentary discretionary trust do not name a particular beneficiary as having a right to occupy.
The trustee lets one child, Evie, live in the home for many years. Evie treats it as her main residence. Under TD 2026/D1, Evie will not hold a right to occupy under the will, because the will itself does not grant that right and the right arises under the terms of the discretionary testamentary trust and the trustee’s discretion instead. This arrangement may result in the estate or trustee having a CGT liability on a later disposal.
Estate administration implications
For executors and administrators, TD 2026/D1 underscores the need to administer occupation arrangements according to the will:
- informal permission to “stay in the house” may not preserve the main residence exemption;
- occupation beyond a time-limited right may restrict the estate to partial relief; and
- a family provision order that operates as a codicil to the will may preserve the exemption where the order grants a right to occupy, consistent with the examples in TD 2026/D1.
Records should clearly show who occupied the dwelling, the legal basis for occupation and the relevant dates.
What you should do now
While TD 2026/D1 is still in draft, it is a timely reminder that the tax treatment of the family home after death may depend on both the will’s wording and how occupation is implemented. An unexpected CGT liability can significantly reduce the value passing to beneficiaries.
If you expect a family member to live in your home after your death, or if you act as executor or trustee, you should:
- review the will to see whether it clearly grants a right to occupy the home to a specific person;
- review the terms of any testamentary discretionary trusts that hold or will hold the home – do not assume that occupation rights under the trust will protect the main residence CGT exemption;
- seek legal and tax advice before you sign or update your will, or before you enter into any post-death arrangements.
The ATO may change its view before it finalises the determination. You should monitor developments and revisit your estate plan as the law and ATO guidance evolve.