You’ve inherited a home: do you owe tax?

Tax on an inherited piece of property depends on a number of factors: Was it a principal residence? Who will live in the property? Do you currently own property? Know the general rules and you can minimize your tax exposure.

  23

by

Online only.

  23

It’s common practice in Canada for parents or grandparents to leave their home or cottage to a child or grandchild. It’s also common practice for the taxman to expect a share of the transfer proceeds, as the value of the property has now transferred from owner to another.

One exception is if a surviving spouse or common law partner inherits the property, then no tax is owed on the transfer of the estate.

Inheriting a secondary residence

In general, however, when a piece of property is bequeathed it may subject to tax, if the property was not a principal residence.

That means if you inherit your parent’s cottage — a vacation home not designated as a principal residence — then the transfer of ownership would be subject to tax. This tax is calculated as if the cottage had been sold at a fair market value.

Under Canadian tax law, the taxes on this transferred cottage property are owed by your parent’s estate (not by the person inheriting the estate).

But, if the estate is cash-poor and property rich, you might find yourself taking out a loan or selling assets in order to come up with the estate taxes owing.

Inheriting a primary residence

On the other hand if the bequeathed property has been a principal residence, your parent’s estate would not be subject to capital gains tax on the disposition of the property.

However, if you were to sell your parent’s principal residence — say, because you already have a home — the sale would be subject to capital gains tax, since you’re selling a piece of property that is not your primary residence.

Sell the house shortly after you inherit and you’ll find the capital gains tax will be nominal, as there will be little difference between the assessed fair market value that was done when you inherited the property and the sale price.

Multiple owners

Of course, all this gets a lot more complicated when you have multiple owners.

Say, for example, your parents leave their primary residence to you and your two sisters. As siblings, you make a unanimous decision to allow the youngest to move into the home and to take out a mortgage to buy out the other two siblings.

Since the youngest now considers the inherited property as their primary residence, they won’t be subject to tax.

The other two siblings, however, would have to pay capital gains tax once the youngest child has moved into the home. That’s because the change in use of the home triggered what the taxman calls a “deemed disposition”— the use of the home has changed, and thus the home is considered to have been sold for tax purposes.

FMV is the key

The best way to determine what’s owed and when is to pay for an independent fair market value (FMV) assessment of the property whenever you anticipate a change in the property’s use.

That means:

  • If you plan on selling your parent’s primary residence, you need to get a FMV price, so you can calculate the capital gains you will owe (subtract the sale price from the FMV price and you’ll know how much you’ll owe tax on);
  • If you plan on renting out the property, instead of selling, you will also need to know the FMV. Because you are changing the use of the property — from primary residence to investment property — the taxman considers the property sold, for tax purposes. That means, you’ll theoretically owe capital gains tax on the difference between the value of the inherited home and the FMV of the home when you chose to start renting it out.
  • If multiple people inherit the home and one child decides to buy out the other siblings, you’ll need to establish a FMV price not only to determine the buy-out price, but also to determine how much tax is owed on the deemed disposition of the property.

An independent assessment of your property should cost no more than $1,000 (and typically starts at $350). Given how much you could save in taxes this fee is a nominal expense.

23 comments on “You’ve inherited a home: do you owe tax?

  1. Here is a question, instead of a comment. My wife & I live in an apartment in Vancouver. The apartment is owned 100% by me because it was bought before our marriage. Her mom owns a house in Edmonton, with a small home equity line of credit balance outstanding. What will happen to the tax situation when the mother passes away? My wife is the only child. Also, is it better to add her name to her mom's property now? Any tax implication?

    Reply

  2. I transferred 2/3 interest in a piece of property other than my primary home to my son several years ago and paid capital gains. I now want to take my name off title completely. Do I pay capital gains again?

    Reply

  3. If I have been renting my parents basement apartment since my divorce twenty years ago, caring for them in their old age. I am to inherit 3/4 of the house value. I plan to sell as soon as possible and move. Will I have taxes? I'm on a disability pension, and have cancer related problems .
    Thank you for any help

    Reply

    • Hi Gayle, thank you for your question. We'd like to address it in our next issue. We'd like to get a little more information from you first. Please email use at ask@moneysense.ca

      Reply

  4. My parents have moved into a retirement residence and they are currently renting out their condo. I'm assuming the retirement residence would be considered their primary residence. Both of my parents names are on the deed of the rental property. Does it make more sense to have my name added to the deed while they are both alive so I'm not actually inhering the rental property or do I still have to pay taxes on the capital gains once they have both passed on?

    Reply

  5. My mother is moving into a retirement home and my brother wants to buy her house. We are executors and power of attorneys and are the recipients of her assets. Is there anything amiss with this situation? I am wary of the sale because in essence, my brother will inherit half of the amount he has paid for the house letting him obtain a $ 600,000 property for $300,000. Am I using faulty reasoning here? Want to keep this above board!

    Reply

  6. My mother has passed away leaving her home and property that she has had and lived in for over fifty years. If we sell the house and property right away will we have to pay Capital Gains Tax on it?

    Reply

  7. I plan to leave my Canadian home to my American daughter. What are the tax issues when a non Canadian inherits a property?

    Reply

  8. I’ve been a renter all my life and so has my husband. We’ve been married for four years now and after some saving we are planning on buying our first home together. However, just recently, my siblings and I sold our family cottage (my parents had transferred it to us twenty years ago). I was hoping to access the first time home buyers plan, does the sale of our cottage now preclude me an my husband from this? Although I was part owner, I didn’t reside there… we only visited at most 3 weekends out of the year.

    Reply

  9. Hello
    My husband and I are looking at purchasing a home from our elderly neighbor but it’s a bit complicated. We’re looking at paying him $300 000 up front to live in the home with him, being that he has difficulty taking care of the property and we will have difficulty getting a mortgage for a home at Vancouver prices. All of us will live together for the next 10 years allowing him to continue enjoying his home (without maintenance) and gives us room to grow when our kids (in theory) are around 5 years old. After the 10 years he’s looking at moving into an old folk facility, at which time we’ll pay him the remainder $300 000 of what we owe on the home. Two questions: 1 will he need to pay taxes on either half payments while he’s alive? 2 If he passes away during those 10 years will his children need to pay capital gains tax?
    Thank you for any advice that you have!

    Reply

  10. My father passed away in 2004 leaving his condo to me and my siblings. His wife, my step-mother, had a life interest in the condo so we are just selling the condo now in 2014. The FMV of the condo in 2004 was $350 000. We sold it for $455 000. How do we calculate the captial gains tax we will have to pay?

    Reply

  11. My parents inherited my uncles farm and are now having to pay capital gains on this .. My dad is not selling the farm but going to continue to farm now himself.. So the farm is probably on paper with over a million but bills and loans are about 400,000 owing so how much tax or what is the percent he will have to pay capital gains roughly…

    Reply

  12. My husband inherited his mothers apsrtment with his sister in 2009. His mother moved from uk in 2005 to Canada. Now after renting out the property my husband wants to sell his share to his sister. What are the tax implications fir him please?

    Reply

  13. I don’t understand why capital gains is charged on a cottage inheritance if the cottage is going to be used and not sold. no money has changed hands , and If the cottage is sold , are you charged capital gains tax again ? what kind of tax lawsis that, makes no sense.

    Reply

  14. What taxes apply if one inherits what has been their principal, rented residence?

    Reply

  15. My grandmother died and willed her shares of a Canadian Island to her three American children. One whom is my mother. What process do they take and what fees or Capital gains would they expect to pay. My wife and I own a Cottage on this family property but no legal ownership to the land. Please give us advice.

    Reply

  16. is a willed property in one persons name only, to a surviving spouse taxable for a capital gain. you have said it is not, however if the property is sold at a later date is that same tax now payable.

    Reply

  17. My mother plans to gift her property to her 4 children on her passing, the property has 2 titles. Her primary residence is on one parcel and my principle residence is on the other parcel. I have 3 other sibling who will also inherit this property, can you tell me if I will have to pay capital gains on this property if it is my principle residence?

    Reply

  18. I’m still wondering about the answer to my situation but don’t see it here. What happens if I lived in the house before my father died and the house was sold? I lived in the house for 10 yrs. before my father passed and also 2 years after he was gone. I have two other siblings of which everyone says shall have to pay Capital Gains Tax but no one is really sure if I have to pay it also??? My friend says, “No, you don’t have to it because it was your Principal Residences beforehand!” but an accountant I talked to told me, “Yes you will still have to pay it because your name was not on the title!” So who, Who, WHO is correct??? I still don’t know! So if you could tell me I sure would appreciate it, thank you!!!!! Sincerely, Kate

    Reply

  19. This article is a bit old but does this still apply:?

    “One exception is if a surviving spouse or common law partner inherits the property, then no tax is owed on the transfer of the estate.”

    I’ll say in advance that we don’t own more than one home and both live in the one home that is under the name of one of us.

    Reply

  20. My brother inherited my parents’ house. When he dies, is he allowed to give the house to his wife (which is my sister-in-law)? He has decided to renounce as estate trustee in 1999.

    Reply

  21. Also would like to mention that my brother lives in Ontario.

    Reply

  22. Let’s say my mother puts my name on the deed Then she passes away. Then I transfer the deed to my brother in exchange for cash left by my Mother. My brother then lives in the house for a number of years and decides to sell it. Will he owe tax when he sells and is it considered an income or inheritance?

    Reply

Leave a comment

Your email address will not be published. Required fields are marked *