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If you sell a property to a relative for a bargain price, does that mean you pay less tax for capital gains?
Do I have to pay income tax if I inherited a property jointly with my sister and she bought me out for less than half the appraised value of the property?
—Johanna
Asset sales between family members can be tricky to facilitate at a family level, let alone from a tax perspective. There are tax implications to be aware of here, Johanna.
First, a primer on how capital gains tax works. For real estate, it’s based on the sale price, minus the selling costs, capital improvements made to the property, and your adjusted cost base (ACB) or acquisition cost.
Also, it’s important to know that 50% of a capital gain is taxable and is added to your other sources of income for the tax year. A large capital gain—for example, on a piece of real estate—can easily push you into a higher tax bracket.
There are nuances related to real estate like whether or not a property might qualify as a principal residence. The sale of a principal residence is generally tax-free. A cottage can qualify as your principal residence as long as you ordinarily inhabit it. It does not need to be the primary place that you live. However, claiming a cottage as your principal residence may expose your home to capital gains tax in the future since you will be limiting the number of years it can qualify as your principal residence.
For example, if you have owned your house for 20 years and your cottage for 10 years and claim the cottage as your principal residence, you will lose 10 years for your house. If you sell your house after 30 years of ownership, 10/30ths will generally be subject to capital gains tax.
Another consideration is whether a capital gains exemption was declared in 1994 if you inherited the property prior to that time. An exemption of up to $100,000 was available until 1994 and taxpayers were allowed to bump up their cost base on eligible capital property like cottages by up to $100,000 on their tax returns that year.
In your case, Johanna, because you inherited the joint property, your initial adjusted cost base or acquisition cost should be one-half of the fair market value as of the date of death of the person who left you the cottage. They would have been deemed to have sold the property at fair market value on their death—a so-called deemed disposition. If the property was not their principal residence, they would have paid tax on their capital gain, if applicable, at that time.
So, if you are not sure of the value at the time of your acquisition, you could generally determine this from the deceased’s final tax return or estate information return for probate purposes where this value would be listed.
A sale of property to a family member or someone who you are not dealing with at “arm’s length” generally takes place—for tax purposes—at fair market value. This is the case even if you legally sell it for less than the fair market value, as was the case with your sister. The same would apply even if you gifted it and were not paid a penny. So, using an artificially low sale price won’t negate the capital gains tax. Capital gains will be calculated based on the fair market value price, Johanna.
If you have recently inherited the property, it may be that the current fair market value of the property and your adjusted cost base are roughly equal, meaning little or no capital gains tax payable.
However, if it’s been a year or more, there’s a good chance that the value has increased based on the performance of many Canadian real estate markets. A realtor may be needed to perform a market value analysis and give you your fair market valuation.
I’m not sure what the motivation was for selling the property at a discount to your sister, Johanna. If it was pure generosity, that’s nice of you, but you still may have tax to pay. Given your charitable intention, you should probably get a donation receipt! But you won’t, of course.
If the capital gain is a large one, and you don’t need the funds, you may consider splitting the receipt of funds from your sister over a period of up to five years, if it’s not too late.
When you do this, you may be able to claim a capital gains reserve and split the capital gain over up to five years and potentially pay less tax. Whether or not this is possible or even worth it is a matter of fact.
For example, the capital gain may not be that significant, or you may be able to offset it with a contribution to your registered retirement savings plan (RRSP) using the sale proceeds from your sister.
In summary, there may be capital gains tax payable on the sale of the home, despite the discounted price, Johanna. This reinforces why it’s advisable to solicit tax advice in advance of undertaking these sorts of transactions to ensure that you understand all of the facts and how best to plan accordingly.
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if 2 parents add their 2 children to the title as joint tenants (to be converted to a LFP or LLC later), i assume then that there is a capital gains tax to be paid at current market value on 1/2 of the property value. gift tax/estate tax issues aside, there seems to be an issue of capital gains and a need for a licensed appraiser to give a market value. how does one report this to the IRS properly? there wasnt a “sale” but there was a transfer of sorts. what does the IRS call this type of capital gain?
How do you determine a value at a given date in the past?
Due to the large volume of comments we receive, we regret that we are unable to respond directly to each one. We invite you to email your question to [email protected], where it will be considered for a future response by one of our expert columnists. For personal advice, we suggest consulting with a qualified advisor.
Hi,
We purchased a home for our adult daughter a few years ago, and left the title in our name. We live in our own home. We now want to transfer title to our daughter. She has lived in the home since purchase and paid all expenses and added significant improvements in the home (carport, concrete driveway, deck, hot tub). From what I now understand we need to calculate FMV and pay capital gains. Is there any rule that would exempt us from paying capital gains? It seems the PPE rule can not be applied since we live in our principal residence. If not, would the improvements (paid by my daughter) that now contributes to a higher FMV, be used to reduce capital gains? Lastly, there will be no real estate fees transferring the home to our daughter so would it be prudent to adjust the FMV to deduct 5% real-estate fees otherwise paid if sold to a 3rd party or would that be shown as a ‘virtual’ expense? Thanks in advance!
Due to the large volume of comments we receive, we regret that we are unable to respond directly to each one. We invite you to email your question to [email protected], where it will be considered for a future response by one of our expert columnists. For personal advice, we suggest consulting with a qualified advisor.
If one family member is purchasing a property from the Estate of a deceased family member is it always the case that the capital gains are paid by the estate before the sale to the family member? So in fact the beneficiaries are all paying fractions of the capital gains?
My mother who is now 90 transfered her house to me about 3 year ago and is still living there but
must move elsewhere. i need to sell it. I work in adifferent city and want to sell it . I believe the price now is about the same as then.do i need to pay capital gains when i sell it.