While it may not be something you want to think of right now, sooner or later, there will come a time when you or a family member will inherit property from a deceased parent or loved one.
Inheriting property or a house can come with its own set of challenges, and during a time when you may feel emotionally drained, having a good understanding of how the process works can make everything a lot easier.
The trust created encapsulates all the property, beneficiaries, and other assets held during a person’s lifetime. It will include various assets and can range from property, stocks, investments, or bonds.
There are a few things one needs to understand about inheriting property in a trust. In Canada, there’s no inheritance tax, meaning you do not have to pay taxes on any inheritance received from a trust. When it comes to receiving property from a trust, there’s also capital gain tax if you do decide to sell it.
So to go above and beyond and to make sure you have the proper knowledge of what an inheritance property is or what you should do with it, you can have a look at the following guide to help you better understand how the process of inheriting a house works, and what you should do if the moment presents itself.
What Is an Inherited Property?
An inherited property can be seen as the sole property or residence of a family member or loved one, which is added into their trust and passed onto either their family, a friend or their spouse.
The inherited property, which acted as the principal residence for the deceased, is included in their trust to pass onto their next of kin or loved ones.
There can be multiple members who have been included in the trust, sometimes not just family members but also friends. Depending on what the trust outlines, some members may need to share the inherited property with others.
What Should You Do After Inheriting a Home?
After you’ve inherited a home, it may be regarded as either a primary or secondary residence, depending on how many people are included in the trust or have received a percentage of the inherited property.
In most cases, those who have received a house as an inheritance will usually appoint a property lawyer to probate the trust and the property. From there, you can then decide on what you want to do with the property, be sure to get the full value of the property, the trust, and the entire estate, this will enable more logical estate planning and can provide legal advice to all the beneficiaries.
If you are the sole inheritance, you can either sell it, live in it, use it as a secondary home, or rent it out. When there’s more than one person involved, you can jointly decide on what you want to do with the property. If you’re looking to sell it, you will need to get it appraised to see what the property is worth.
Those who decide to live in the property will need to contact their home insurance provider to ensure that all the necessary transfers and name changes on the estate can be made.
It’s advisable that in the event there is more than one person involved in the trust or the property inheritance that they decide on the best option and the road going forward. Make sure to evaluate all the possible options there are, and see what works best for you and those you share the inheritance with.
Taxes on The Sale of An Inherited Home
As previously mentioned, there is no inheritance tax in Canada, meaning that if you receive money from a trust as an inheritance, you do not need to pay any taxes on it. On the other hand, if you decide to sell the inherited property, you will be subjected to capital gains tax.
Capital gains taxes are paid on any income you receive from an investment or sale of goods or items. After you’ve received the property from the trust, you should get the Fair Market Value (FMV) of the property for probate services.
Additionally, you should also keep in mind that if you do decide to keep the property as a secondary home or vacation house, you will still be subject to property taxes and maintenance costs.
For tax purposes and for the reasons of tax liability, the estate trustee will be subject to various tax implications and estate tax, and should be aware that they will need to pay capital gains tax.
For example, if your deceased grandparents left you a house that they purchased for CAD 100,000, and after the appraisal, the property value is now CAD 350,000, you will need to pay capital gains taxes on the CAD 250,000 increase in capital if you wish to sell it.
Unless you’re not able to pay the capital gains tax on the CAD 250,000 or do not have the money to pay for it, the taxes will then be deducted from the entire estate or trust. There’s also the route where the inherited property can be used as a family home or principal residence, which allows the trustee only to owe 50% capital gain tax.
Should you agree to sell the house in the near future, you will still be subject to 50% capital gain taxes on the sale of the FMV.
Inheriting a House in A Trust
Although selling the house is usually the standard option for many people, as it comes with less stress and maintenance, there are a few things you have to do right after you inherit a home.
What Do You Have to Do After You Inherit a Home?
Continue Maintaining the Home
Ensure that general upkeep of the property is maintained; this may include looking after the garden, repainting the interior and exterior of the house, and replacing any outdated or weathered windows, doors, glass, or roof tiles. Fix any leaks or cracks.
While general upkeep of the property may come at additional expenses, this is usually done to help raise the value of the property. In some cases, those who have inherited the property and will not be using it as a primary residence may completely renovate it to raise the value even more before putting it on the market.
This does take a bit of time to get done, but in the long run, it helps to do a bit of maintenance on the wear and tear the house may have endured in the last few years.
New Insurance Coverage for The Home
Even if the house does have some sort of insurance coverage plan, it’s good to review the existing plan with the insurance company before you move on to doing anything else with the home. For starters, the house may only be covered for certain criteria, and after you’ve completed any renovations or maintenance, those may need to be removed, or new ones added.
Furthermore, those who are on the original insurance coverage plan may not be around anymore, and this is where you should add your name and personal information to keep the insurance plan going during the time the house is standing empty.
There’s also the fact that some people may use their inherited property as a vacation home, which might stand empty for a majority of the year. These types of property will have different insurance plans and can be reviewed with your current home insurance provider.
List Heirs on The Title
Once you’ve decided what your plans will be with the property, either selling it on the market or renting it out, you will need to include the heirs in the title of the property in the trust. The heirs are those who have been directly appointed a percentage of the property or the inheritance thereof.
Those who have been listed will then receive a percentage from the sale, or perhaps passive income from renting it. Listing the heirs helps the process become a lot easier, as those who are directly involved will be solely responsible for all the taxes and upkeep costs of the property.
Get a Fair Market Value Assessment
The Fair Market Value (FMV) assessment should either be completed on the date of the person’s death or as soon as possible. Property and the real estate professional will be able to conduct the FMV and will give price value on the house at its current state.
If an FMV is not completed during the first few weeks or months after the death, and you have decided to conduct any maintenance and repairs, you will then need to get an appraisal of the property in the condition it’s in after you’ve completed the renovations.
It’s important to get an FMV as soon as possible, as, over time, the value of the property may either decrease, depending on the situation and state of the house, or increase after you’ve conducted renovations.
In the event, you do not complete an FMV, and you perhaps have access to the documents which stipulate the price the original tenant paid for the house, the property professional may be able to use this as a way to get an appraisal value.
What Should You Do With the Property?
There’s a lot you can do with the property once it’s been registered in your rightful name or other heirs. If you are not the sole owner or heir to a property, you will need to decide among the other listed heirs what will happen to the property and how you will be dividing the cost and maintenance thereof.
Whether you decide on selling or perhaps renting it, many property specialists and trust lawyers advise that the listed heirs should come to a general consensus on what they want to do with the property or the remainder of the trust.
Yet, it’s not as easy as it may seem, as many people sometimes feel they want to keep the property, based on personal and emotional nostalgia connotated with the property, or perhaps use it as their vacation or a secondary family home.
Following a legal procedure will help stipulate legal regulations and guidelines which all sides need to agree upon, as this can save them a lot of time, money, and administration costs.
Generally speaking, renting the house would be considered a very smart choice, as this gives you an additional passive income. But although renting may seem like a lucrative or a financially viable option, there are some additional regulations and by-laws you do need to be aware of.
Renting it out can come with great benefits and ownership, especially if you inherited a home without a mortgage, which can now be used as a financially viable asset.
If you’ve never been a landlord or the owner of a secondary home, it’s advised that you contact a property manager that can help determine how much you can rent the house for, what the costs are involved, and how the process works.
Furthermore, some taxes may need to be paid on both the property and the rental income, which is seen as capital gains tax. More so, when renting the property, contact the local Homeowners Association so that you have a better idea of what some of the HOA fees might be and also how much upkeep and maintenance will be on the property.
So if you do decide to rent out the property, it’s advised to appoint a property manager that can help deal with screening tenants, general upkeep and maintenance of the property and the house, and also help you with the regulatory administration that comes along with being a landlord.
Unfortunately, this does however come at an additional cost, as some Toronto property managers can take between 8% and 10% of the rental income. So while they can make your workload a lot less, it comes at an added price to it as well.
Before you can sell it, you will need to follow a few steps to ensure you have all the best options to choose from. In some cases, it’s advised to acquire the help of at least two to three real estate agents, this way, you will have a better idea of the type of services and costs involved in the selling process.
If you are the sole owner of the inherited property, you can then decide on a realtor and put the property on the market. If there is more than one person involved and all have decided on the same realtor, you will then need to draw up a Listing Agreement.
When completing the Listing Agreement, you and those involved should estimate the estate administration tax and mortgage payments that may still need to be included with other trust assets.
Some people make use of a property lawyer, which helps to guide them through the process, and assists with any legal queries you may have. Once the property has been listed and sold on the market, you will then need to pay capital gains taxes on the sale.
Another option is to move into the house and make it your new family home. In many cases, an heir to the inherited property will move in and use it as a secondary home or perhaps their vacation home.
Moving in requires you to become listed as the sole owner of the property. There are a few things you need to take into consideration before taking up residency in the secondary home.
For starters, while you may be moving in, you may still be subject to capital gains taxes from your current principal home. It’s advised to review on which property you will pay more capital gains taxes.
Secondly, if you do meet the requirements financially, you will need to pay for maintenance costs and property taxes, and if there’s still a mortgage on the house which hasn’t been paid by the trust, you will inherit that as well.
While moving in may seem like an easy option, there are still some challenges that may present themselves now and again. Thus it’s advised to review all your possible options and decide on one that’s the most affordable and suitable for you.
Donating any property is a major contribution to the selected organization or nonprofit of your choice. There are some complications, however when it comes to donating a property.
First, before anything else, you will need to make sure that the property has been appraised or received an FMV assessment.
The property may still be subject to other taxes and rules, depending on the fair market value. This may make it a bit more difficult to donate the inherited property or the money from the property sale.
As a donor, you will also need to make sure that the donee, the person, or the nonprofit who’s receiving it can accept it.
Secondly, you will need to draw up a notarized gift deed, which is a signed deed that legally transfers the property from the trust to the donee.
Always review the legal and tax regulations of donating from a trust beforehand, and liaise with a legal professional that can help you with the process.
How Can I Avoid Paying Taxes on An Inherited Property?
Some exemptions allow you to avoid paying taxes on inherited property, including Principal Residence Exemption and Lifetime Capital Gains Exemption.
For Principal Residence Exemption, you will be overseen to not pay any capital gains on the sale of a primary residence. But to qualify, you will need to have lived in the primary residence every year you have owned it.
Secondly, for capital gains deductions, you may be exempt from dispositions of small business corporation shares, or farm and fishing property.
What to Do if You’re Inheriting a Home With A Mortgage?
If an inherited house still has a mortgage, you may be required to pay off the mortgage with money from the trust. Additionally, it’s possible to repay the mortgage with the sale of the property itself, or you may be required to repay the mortgage for the remainder of the time the mortgage is still active.
Most people tend to sell the home and repay the mortgage with the remainder of the money they received from the sale. This usually makes the process a lot easier and simpler, as it doesn’t entail the inherited party to stress or deal with the ongoing mortgage.
Can Siblings Force the Sale of Inherited Property?
If you want to become the sole owner of inherited property and a sibling wants to sell it, you may be able to buy out those who wish to sell the property. Depending on the appraisal of the property and how many people are involved in the trust, you will purchase their share at the divided percentage of the appraisal value. ‘
In case you do not have the capital to buy out a sibling, you may request a public buyer to help you buy out any remaining people.
While the process of losing a loved one isn’t easy, knowing how to deal with property inheritance is valuable knowledge that not everyone is taught throughout their life.
There are a lot of unwritten aspects when it comes to dealing with trust and estate-related defiances, and when you’re in the position of sorting out everything by yourself, it can quickly become a stressful endeavour.
Property inheritance, along with other asset inheritance, can come with its own set of challenges. So whether you’re thinking of selling, renting, donating, or perhaps even moving into the property – there are legal procedures that need to be followed and adhered to at all costs.
From property gains tax to paying for legal and administration fees, the costs of dealing with property inheritance can quickly become a task on its own.
With the right information and proper guidance, whether it be from a property professional or legal expert, you’ll have the right framework to follow while at the same time enjoying the memories that have been left behind for you.