Tax Question: Capital Gains on Real Estate Inheritance

[Keebler Elf]

Anybody know the answer to this?

Scenario: Last parent dies, two siblings inherit the house (equally).

Sibling A had been living in the house with remaining parent (now deceased).

Sibling B owns and lives in a different (own) house (principal residence).

How does the capital gains work?

I'm thinking Sibling A pays no capital gains because the house was their principal residence. Sibling B owes capital gains on their share of the house's value.

Or does Sibling B's capital gains take affect prior to the splitting of the house's value? (which would be weird I think)

Could Sibling B avoid capital gains by having Sibling A inherit the house (no capital gains tax), sell it, then gift 50% of the value to Sibling B?

 

[mandrill]

Get proper tax advice, but here is my off the cuff....

Parent lives in house and passes it tax free to his/ her children due to "principal residence" capital gains exemption on parent's estate. Doesn't matter if kids were living there or not.

 

[Mike Litoris]

If the house is still in the deceased parents name, it would be part of the assets owned, and assuming there is a Will would be paid out to the beneficiaries according to that Will. There would not be any inheritance tax in this case.

If one Sibbling wants to stay there, you must obtain Market Value on the house as of day of death using a real estate agent and have both beneficiaries agree. One Sibbling would pay the other off, but there would be no tax implications.

 

[Caspertheghost]

The above is correct. Assuming home was in the final parent‘s name, their estate receives it. If it was principal residence of the parent, no cap gain. Then (assuming there is a will) the estate disburses to the two heirs, again no tax for either of them as we don’t have inheritance tax in Canada. Yet.

If no will, then legislation provides equal split among all children, same result except may be additional legal expenses...

 

[Caspertheghost]

[continued]....

However, one small overlooked detail that you don’t want to mess up: OP is grateful for the free legal advice and must treat Caspertheghost to a two hour session with his favourite provider.

 

[Malibuk]

I thought sibling A would have had to pay a lawyer to go through a probate process in order to avoid the taxes.
If not, why do people pay lawyers for this service?

 

[skypilot68]

I thought sibling A would have had to pay a lawyer to go through a probate process in order to avoid the taxes.
If not, why do people pay lawyers for this service?

very simple question, money make people greedy. you dont need a lawyer to probate a will but if there are multiple siblings, ex wives, etc, lawyer is advisable. As long as there is an executor for the will. It is like a divorce, technically you dont need a lawyer either.

 

[MattyMcG92]

Anybody know the answer to this?

Scenario: Last parent dies, two siblings inherit the house (equally).

Sibling A had been living in the house with remaining parent (now deceased).

Sibling B owns and lives in a different (own) house (principal residence).

How does the capital gains work?


Hi Keebler Elf,

I handle tax and estate issues as part of my two professions.

Disposing of your principal residence - Canada.ca

Disposing of your principal residence

www.canada.ca

Assuming the deceased homeowner did not have other property(ies) that he/she could have designated as their principal residence, the home being discussed is the deceased's principal residence for tax purposes. Generally, the deceased will not incur a capital gain on the sale of their home due to the principal residence exemption (principal residence defined in Section 54 of the Income Tax Act). This will be most likely the case if the property was solely your parent's principal residence for every year they owned it.

After the death of the surviving spouse (last living parent), the principal residence becomes part of their estate. Please note that if you do not intend to sell the home fairly promptly, it may be a good idea to have it appraised as of the date of death. The gain from the time the home was purchased to the date of death is exempted. However, if the home is held for a longer period after the death (for example 1 year) before it is sold, the Canada Revenue Agency may contend that some of the gain was after the date of death and therefore that portion is not exempted.

Sibling A has no tax implications from the sale of the home since he/she was not a joint owner of the home but simply lived there. Please also note, since the 2016 tax year, the sale of a principal residence must be reported on Schedule 3 of the deceased's final tax return in order to claim the principal residence exemption.

Assuming the home was solely owned by the deceased, the Estate representative will have to apply for Probate (Certificate of Appointment of Estate Trustee with a Will). Probate is the procedure to ask the court to confirm that the deceased's will is their valid last will and to confirm the authority of the person(s) named as the estate trustee in the deceased's will. In the GTA, the process pre-Covid used to take about six months but it is taking substantially longer right now.

Apply for probate of an estate

Learn how to apply for probate of an estate.

www.attorneygeneral.jus.gov.on.ca

Cheers,

Matt

 

[MattyMcG92]

very simple question, money make people greedy. you dont need a lawyer to probate a will but if there are multiple siblings, ex wives, etc, lawyer is advisable. As long as there is an executor for the will. It is like a divorce, technically you dont need a lawyer either.

Skypilot68,

You are correct that a lawyer is not needed to apply for probate, but if any of the filings are done incorrectly, the Court rejects the application and you get it back in the mail 9 months or so after applying. This may cause some tension among the other beneficiaries since, from my experience, they are tearing down the gates to get their cash.

Cheers,

Matt

 

[mandrill]

I'm guessing that applying for probate is something property lawyers charge a competitive block fee on and you can get professional help pretty cheaply.

 

[MattyMcG92]

I'm guessing that applying for probate is something property lawyers charge a competitive block fee on and you can get professional help pretty cheaply.

Hi Mandrill,

In most cases a probate application is very straightforward for an Estate lawyer. The process and the forms can be found at this link if you want to attempt it yourself.

Apply for probate of an estate

Learn how to apply for probate of an estate.

www.attorneygeneral.jus.gov.on.ca

One of the bigger challenges I have found is when clients have used those do it yourself will kits available at Staples and other stationary stores. The witness signatures in a will are supposed to be accompanied by an Affadavit of Execution, sworn/attested by a Commissioner of Oaths (any lawyer or public notary). But to the best of my knowledge this important fact may not be discussed in the kits.

http://ontariocourtforms.on.ca/static/media/uploads/courtforms/civil/74_08/74-8-rev1110-EN.pdf

I recently had a client whose deceased husband completed a will in 1995 without an Affadavit of Execution. We had to track down the witnesses who are now in their 80s. It was a challenging process. If the witnesses had died or we could not locate them, we would require a Court Order before we could apply for probate and the process would have been very costly for the client.

Cheers,

Matt

 

[skypilot68]

Skypilot68,

You are correct that a lawyer is not needed to apply for probate, but if any of the filings are done incorrectly, the Court rejects the application and you get it back in the mail 9 months or so after applying. This may cause some tension among the other beneficiaries since, from my experience, they are tearing down the gates to get their cash.

Cheers,

Matt

Matt

you are correct, that is my experience as well, "beneficiaries are tearing down the gates to get their cash". In the end it all about the money.

 

[Keebler Elf]

Thanks, this is very helpful! You mention Sibling A has no tax, what about Sibling B? (who owns their own principal residence)

 

[MattyMcG92]

Thanks, this is very helpful! You mention Sibling A has no tax, what about Sibling B? (who owns their own principal residence)

Hi Keebler Elf,

Since Sibling B is not a joint owner on the deceased's home, he/she will have no tax implications on the sale of the home.

The estate will have to pay probate fees when the application for probate is approved. In Ontario, probate fees are $5 for every $1,000 (0.5%) of assets up to $50,000 and $15 on every $1,000 (1.5%) of assets over $50,000.

What are probate fees and can I reduce them? | Steps to Justice | Your guide to law in Ontario

Probate fees, also called estate administration tax, are fees that are paid to the Ontario government. The amount of the fee is based on the total value of the property in your estate when you die. The less property you have in your estate when you die, the lower your probate fees. In Ontario...

stepstojustice.ca

.

Best Regards,

Matt

 

[jerbear15]

I thought sibling A would have had to pay a lawyer to go through a probate process in order to avoid the taxes.
If not, why do people pay lawyers for this service?

It goes to probate unless 1 of the kids is on the deed. Also waiting for probate can take up to a year and right now due to covid it's going to take longer. Same goes with any investment or bank accounts. Some banks treat things differently also

 

[jerbear15]

It goes to probate unless 1 of the kids is on the deed. Also waiting for probate can take up to a year and right now due to covid it's going to take longer. Same goes with any investment or bank accounts. Some banks treat things differently also

Probate is the tax u pay but it or at least most of it can be avoided.

 

[nlt76]

Anybody know what would happen if, say, the will said it goes to 3 siblings, but, two want it to go to the one that lived at the house with the parent. Would they still have to be bought out based on market value or could they just be given a very small portion of the inheritance if that is all they want?

 

[bazokajoe]

Not every house has to go through probate.
Alot depends on if there is a will and when the parents bought the house. At least that's what a lawyer told me when my Mom passed.

 

[MattyMcG92]

Anybody know what would happen if, say, the will said it goes to 3 siblings, but, two want it to go to the one that lived at the house with the parent. Would they still have to be bought out based on market value or could they just be given a very small portion of the inheritance if that is all they want?

Hi Nlt76,

If the Will specifies property is to be split evenly among the three siblings then we can assume the three siblings should each have an equal one third ownership of the home. If the two siblings want to sell their ownership shares for consideration less than fair market value ("FMV"), it does trigger tax implications and may result in double taxation. I can provide a numerical example which will make the double taxation scenario more clear if you would like.

To avoid potential double taxation, it is recommended that real estate should not be transferred among family members for consideration at a value other than the FMV. However, in the scenario provided, the two siblings can consider gifting cash to the one sibling and then the one sibling can use the cash to help buyout the other two at FMV.

Other transfers of property - Canada.ca

Information on special rules that may apply to transfers of land, buildings or other capital assets.

www.canada.ca

Cheers,

Matt

 

[nlt76]

Hi Nlt76,

If the Will specifies property is to be split evenly among the three siblings then we can assume the three siblings should each have an equal one third ownership of the home. If the two siblings want to sell their ownership shares for consideration less than fair market value ("FMV"), it does trigger tax implications and may result in double taxation. I can provide a numerical example which will make the double taxation scenario more clear if you would like.

To avoid potential double taxation, it is recommended that real estate should not be transferred among family members for consideration at a value other than the FMV. However, in the scenario provided, the two siblings can consider gifting cash to the one sibling and then the one sibling can use the cash to help buyout the other two at FMV.

Other transfers of property - Canada.ca

Information on special rules that may apply to transfers of land, buildings or other capital assets.

www.canada.ca

Cheers,

Matt

Thanks for the info, Matt. Think me and my other sister could simply ask that our names be taken off the will without going the cash gifting route?