An Australian resident who inherits an apartment or a farmhouse in Italy is dealing with two tax systems at once, and the assumption that trips people up is usually imported from somewhere else — often from a conversation with an American relative whose own country works differently. In the United States, inherited property typically gets its cost base "stepped up" to market value at death, which can wipe out decades of unrealised gain for tax purposes. Australia does not work that way.
No step-up for property acquired after 20 September 1985
If the person you inherited from acquired the Italian property after 20 September 1985 — the date Australia's capital gains tax regime began — you inherit their original cost base, not the market value at the date of death. "Cost base" means broadly what they paid for it, plus certain costs of acquiring, holding and improving it, converted into Australian dollars at the exchange rate applying when each cost was incurred. If the property has been owned in the family for thirty or forty years, that original cost, in the currency and prices of decades ago, is what the eventual capital gain will be measured against — not what the property was worth when you received it.
There is one exception: if the property was acquired by the deceased before 20 September 1985, it is treated as having been acquired by you at its market value on the date of death, because pre-1985 assets sit outside the CGT regime entirely and the value needs to be reset to bring it in. For most inheritances this will not apply — Italian property passed down through a family is often held well past that date — but it is worth checking when the original purchase actually happened.
Why this usually only matters when you sell
Inheriting the property itself is not a capital gains tax event, and holding it produces no Australian CGT liability. The carried-over cost base only becomes relevant the day you dispose of the property — by sale, or by transferring it to someone else other than as a further inheritance. That is when the gap between the old cost base and the current sale price is calculated, and it can be a far larger gain than an heir expects if they assumed, from hearing how it works for American relatives, that the cost base had been reset at death.
The main residence exemption usually will not help here
Australian tax residents who sell their own home are often used to the main residence exemption applying, and there is a separate rule that can extend a version of that exemption to a home inherited from someone else — but it comes with conditions tied to the dwelling having been the deceased's main residence under Australian rules, among others. An Italian property that belonged to a relative who lived in Italy, and was never the deceased's Australian main residence, will not generally meet those conditions. Do not assume the exemption carries over just because the property was a family home in a broader sense; check the specific conditions against your own facts rather than relying on how the exemption worked for an Australian-based inheritance.
The 50% CGT discount can still apply
Separately from the main residence question, Australian resident individuals who have held a CGT asset for at least twelve months before disposing of it are generally entitled to discount the taxable gain by 50%. For an inherited asset, the holding period used to test that twelve months can include the time the deceased themselves owned the property, not only the time since you inherited it — which matters if you intend to sell relatively soon after the estate is finalised rather than holding it for a further year yourself. Whether this applies to your specific timeline is worth confirming with an Australian tax adviser before you set a settlement date.
Currency conversion runs through the whole calculation
Because the cost base, any later improvement costs, and the eventual sale proceeds are all in euros, each needs converting to Australian dollars at the exchange rate applicable on its own date — the date of each cost, and the date of sale — not at a single rate applied to the whole transaction. Keep the euro figures and the dates separately; an Australian accountant will need both to do the conversion correctly, and getting the dates wrong can shift the calculated gain noticeably given how much exchange rates move over a multi-decade holding period.
Two files, two sets of rules
The Italian succession file determines who inherited and under what Italian valuation; the Australian capital gains question is a separate calculation that uses the deceased's original cost, not that Italian valuation, as its starting point. For the Italian side of an estate with an Australian heir, see our guide on inheriting Italian property from Australia. If you are weighing whether to keep, rent or sell an inherited Italian property and want the Italian side of that decision checked on its own facts, you can ask for a free consultation.