Dealing with your feelings and loss after the death of a loved one can be very exhausting; figuring out what to do after inheriting real estate from them just adds another layer to this exhaustion.
Inheriting real estate and other assets is on the rise, and many people will be faced with the issue of figuring out the intricacies of Canadian capital gains tax on inherited property.
While there is no Canadian inheritance tax on property, there are quite a few situations where taxes might be owed on the properties that are now in your possession. The problem for most people is figuring out if those taxes apply to them!
Let’s review the basics of Canadian inheritance procedures when it comes to dealing with capital gains taxes and selling any inherited properties for profit.
What Are the Rules for Canadian Inheritance Tax on Property?
Generally speaking, inherited properties are considered to be nontaxable. If your parent passes away and leaves their house to you, you will not have to pay a tax for taking over ownership of the property.
However, there is a small exception worth noting here. If your parents leave you a secondary place of residence such as a vacation home, the capital gains taxes on the properties will be your (or their estate’s) responsibility to cover before you can take over ownership. Commercial properties are treated in the same way.
So, what are capital gains, and how do they affect your inheritance?
Capital Gains on Inheritance in Canada
To understand everything you may be responsible for as you sort through the inherited assets received from a loved one, it’s important to break down and understand capital gains.
What Are Capital Gains and the Capital Gains Tax?
The profit you make on an item when selling it is known as a capital gain.
If you buy a gold ring for $20,000 and later sell this rare piece for $100,000, your capital gain would be the difference: $80,000.
Because capital gains are considered to be a type of taxable income, the capital gains tax is the amount of money you must pay on the profit made in this type of sale.
Is There a Capital Gains Tax on Inherited Property in Canada?
Many people who inherit property ultimately decide to sell the property because they already have their own home or they have no interest in keeping up the property. If you choose to sell, you will have to deal with the Canadian capital gains tax on inherited property.
While this seems fairly straight forward, it is not always simple to calculate this number.
There are four different situations that most people need to be aware of:
- When selling your primary residence, capital gains are not taxable. The passing of a primary residence through inheritance is considered a primary residence sale, and as such, there is no capital gains tax.
- When selling an inherited property, you are liable for the taxation of 50% of the capital gains.
- When selling secondary residences, capital gains are taxable.
- When selling a commercial property, capital gains are taxable.
A traditional capital gains amount is calculated by subtracting the fair market value at the time of purchase from the sale price. When you are selling an inherited property, however, you may not know the purchase price, and the value is often calculated from the time that you took possession of the property.
So, while there is not an inheritance tax on property in Canada, there are a number of things that you must understand to make sure you file and pay all appropriate taxes.
How Do I Figure Out the Capital Gains on Inheriting Real Estate in Canada?
Now that you have an understanding of what capital gains are and why they matter when inheriting real estate, let’s break down what you should do when you inherit the property of any type.
1. Get An Appraisal & Save Any Older Records
Regardless of whether or not you plan to sell your inherited property, the first thing you should do is get a fair market appraisal on the property. Having this information about the property’s value when you take possession will be useful if you ever sell or gift the property to someone else.
Never skip this step when acquiring property through inheritance. It can save you a lot of work at a later date, so this the only thing you should focus on doing as soon as the property is yours.
2. Pay Capital Gains Tax If You Inherited A Secondary Property
As previously mentioned, vacation homes are considered to be taxable if you inherit them.
Let’s say your parents bought a vacation home for $50,000 in the 70s. When you inherited it, it had a value of $125,000. This means that you would owe capital gains taxes on the $75,000 increase in capital. If you choose not to or cannot pay this, the value will be taken from the deceased’s estate.
Had this home been a primary residence, you would only owe tax on 50% of the capital gain.
3. Pay Capital Gains Tax When Selling The Property
If you decide to sell a primary residence that was gifted to you, you will be responsible for paying 50% of the usual capital gains tax when you do so. Knowing this in advance will help you better understand what type of property margin to expect from the sale.
If you choose to keep the property, you will not need to pay a capital gains tax as it was a primary residence, and the final tax return of the deceased will pay any owed tax. Should you choose to sell the property in the future, you will need to pay 50% of capital gains when you do so.
4. Plan For Your Estate’s Future
Now that you know what is involved with inherited properties, you can set up the future of your estate to make the process simpler for any benefactors.
Keep up-to-date and organized appraisals of all properties, commercial, residential, vacation, or otherwise. Whether you ultimately decide to sell these properties or leave them to someone in your will, the documents will help ensure a clear record of taxation requirements at a later date.
5. Consider Renting
If you already have a primary residence but you decide to keep the inherited property and turn it into a rental property, you will need to pay capital gains taxes as you are converting the property into an investment property.
After you inherit a house, you have more options than just selling. Though converting an inherited property into a rental property would require you to pay capital gains taxes, some may see the appeal in taking on the job title of Rental Investor to earn extra income.
FAQs About Inheriting a House in Canada
Do I Pay Taxes On Inherited Property?
When inheriting a home, there are no taxes that you will need to pay immediately unless the property is a secondary (non-primary) residence of the deceased. Any capital gains taxes that are owed on the property for the transfer are handled in the final tax return of the deceased, and the Canadian government treats the property as if it was sold by the deceased.
Is Capital Gains Due On Inherited Property?
Capital gains tax is not due on an inherited property unless one or more of the following applies:
- The property was a secondary or vacation home
- The property will be converted into a rental investment property
- You sell the inherited property
Do You Have To Report The Sale Of Inherited Property?
All property sales must be reported properly. If you are selling an inherited property that was a primary residence, you will need to report it and pay 50% of the capital gains tax. The tax will be charged based on the difference in the value of the property from when you received it to when you sell it.
How Long Do I Have To Sell An Inherited House?
There is no time limit on when you must sell an inherited house after inheriting property in Canada. Regardless of when you sell the property, you will be taxed at 50% of the property’s change in value as a capital gains tax on the inherited property, if it was/is a primary residence and not something like a vacation home.
What Is The Holding Period For Inherited Property?
There is no minimum or maximum holding time for inherited property in Canada. Unlike other countries where the taxes change depending on how long the property is held before selling, there are no such rules in Canada.
One thing to keep in mind is that you will continue to owe property taxes on the property as long as you hold it; make sure that you are prepared to handle these if you want to hold onto a property. Selling the home quickly if you have no plans to keep it long term can be a smart way to avoid unnecessary taxation.
Do You Need To Declare Inheritance On Tax Return?
Gifts and inheritances in Canada do not need to be declared on tax returns as there is no inheritance tax on general inheritances. Inherited properties, however, must be declared in certain situations:
- When an inherited property is sold
- When filing the final tax return for a deceased person; their estate will owe capital gains tax
- When a vacation home is inherited
- When inherited property is converted into a rental property
In these situations, there are some taxes that may be owed, so it is necessary to make sure that the sales and transfers of the properties are properly declared in tax returns.
How Is Capital Gains Calculated On Sale of Inherited Property?
In Canada, primary residences that are inherited are taxed at 50% of the change in property value when they are sold. Second homes, such as vacation homes, are taxed at the full capital gains rate when they are inherited, so the standard capital gains rules apply on later sales.
Dealing with the Canadian capital gains tax on the inherited property can be very complicated, especially if you are not familiar with the intricacies of tax laws. Thankfully, there aren’t too many exceptions you need to keep up with, and this guide covers most of what you need to know about these laws.
While we are happy to provide general information about these topics here, we cannot give you specific advice. To handle your own situation and get the most up-to-date information, contact an accountant to assist you with the inherited property transfer and documentation.
While you decide whether or not to hold onto the property in question, an experienced property management company can help you effectively manage the property while you work through the process.