First off, my condolences to you and your family.
There are very complicated tax implications that can arise when you inherit property.
Let’s discuss inheriting a primary residence, a farm, a cottage or even a rental or commercial property. We’re going to look at all four of those situations and what you need to consider.
Inherited a Primary Residence
If they paid 200K for that house and it’s now worth 500K, that entire amount is tax exempt. Now, you must decide what you are going to do with this property?
What most folks decide to do is a deemed disposition on death. A deemed disposition on death means that it is deemed to have been sold. Since the property is deemed to have been sold, it will form part of their estate.
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You’ll most likely want to cache that portion out of your estate and if that’s the case, you’ll need to put the property for sale and pay the fees, the commissions, etc.
The great news is that it’s going to be mostly tax free – exclusively tax free if it’s their primary residence.
If you do decide to keep it for a few years and you decide to keep it in the estate for a few years, this could get a little complicated because now you’re going to have to check in on the property.
The estate is going to have some bills. You’re going to want to make sure that someone is maintaining it and checking in on the property.
It often gets a little bit more complicated and if you do decide that you want to keep the property, you’ll need to do a title change and must pay for the land transfer tax.
Let’s say your parents or your Great Aunt Gertrude left farmlands to you. Now you’ll need to look at a few things. Specifically, when did they buy the farm? Who’s been farming it? How long have they been farming it? What’s the relationship to you with respect to farming?
The Canadian government allows a onetime lifetime capital gains exemption on qualified farmland.
Now, if your land is qualified farmland, $1 million is the maximum exemption. Whether or not your land is qualified is a bit of a complicated test and it’s an entire other topic, but just know that you can potentially qualify for that based on a whole set of factors.
You exempt that million bucks in taxes on the capital gains. Now, the neat thing about a sale of farmland and a sale of any asset at a higher value sometime in the future, the capital gains tax is usually less than it would be on interest income.
It’s taxed at about half the rate.
In this scenario, you got farm land that you inherited, and it was owned either personally or it was potentially owned in a corp.
You’re going to have to look at whether you’re getting the capital gains exemption or not. If not, this will be a deemed disposition. You’re going to have to pay the tax on the difference of the value that they paid for the farm land versus what it’s worth today.
If it did qualify for capital gains exemption or a portion of it, that’s great news. You’re exempting for that portion with respect to the capital gains exemption.
Make sure you are aware of the following information:
Even though Great Aunt Gertrude might have gotten her capital gains exemption in the eighties, nineties or early 2000s when she sold her last piece of property of the respective farmland, there’s the possibility of a top up that now that exists because the government has moved the number over time from 500K to 750K to now 1 million dollars.
There is a potential new pool of money there that can be used to protect some of those capital gains. The passing of farmland is a bit complicated, you simply need to consider all those factors.
Talk to your tax expert on this topic.
You inherited a cottage, now what?
Cottage country is fun, and we want to leave our cottages to our kids. We want them to enjoy it and we want the grandkids to enjoy it.
Common scenario for many Canadians. This is likely a secondary residence and, in the event, that it is a secondary residence, you do not get the exemption for capital gains.
Cottage tax planning can be complex. We often find out that people bought these cottages a generation ago. The cottage might’ve been purchased for 50K in the 60s and it’s now worth a couple million dollars. Unfortunately, that is a complete capital gain that the estate will need to pay.
In a situation where mom and dad didn’t have tax planning in place and didn’t have insurance in place, that becomes a significant tax bill that needs to be paid by the estate. If there’s no insurance, then you and your siblings have a couple of choices.
- You can either buy out a potential half and pay the tax bill through a mortgage and you could do that through a bank.
- You could cut a check for the tax from the estate with other assets.
- If there are no other assets, you’re going to need to put a mortgage on that property.
- Other option we see sometimes is just a straight sale of the cottage. The cottage gets sold, the tax gets paid, and the proceeds get distributed amongst the beneficiaries.
It’s very important to stay on top of the tax planning for your cottage. When you’re thinking about inheriting a cottage, you should do that while Mom and Dad are alive.
It’s important to factor the potential tax consequences while you’re living because the tax planning on that can save a whole bunch of headaches for the executors and for the kids down the line.
The rental or commercial property is either going to be owned personally or it’s going to be owned in a Corp.
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Maybe Mom and Dad left you a commercial real estate mall at a nice juicy intersection that generates nice cash flow and is owned in a Corp.
If it’s owned in the Corp., that means they left you shares of that Corp. Whatever shares that you owned are now deemed to have been disposed and you now need to pay tax on them.
It’s important to factor that in.
If the properties were owned personally, well then, we’re going back to the cottage situation. It becomes an asset that has appreciated and now the estate must owe some capital gains tax on its appreciated value.
Whenever you are inheriting a rental property or a commercial property, the tax advantage is that you can depreciate the value of that respective property as an owner.
That means that over time your ACB (average cost base) gets reduced and it gets diminished.
That simply means that you are deferring a tax bill to either yourself down the line, your estate down the line or the next generation.
In other words, you will own that property.
Currently, if your parents pass away and leave you a property that’s been depreciated over time and now has an ACB of zero, you’re going to have a significant tax bill on your hands and you need to factor in the tax planning ahead of time for that as well.
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