Inheriting Real Estate – Should you Keep or Sell?

Inheriting property can be an emotional event. In one way, your family just lost a loved one. On the other hand, you’ve possibly been gifted one of the biggest contributions of your life. Dealing with whatever life throws at you can be complicated, but luckily there are professionals to help you every step of the way while you grieve and process. It’s common practice for parents or grandparents to leave their home or cottage to a child or grandchild. However, that means the taxman could expect a share of the transfer proceeds, as the value of the property has now transferred from one owner to another. Another aspect is whether or not it is a primary residence or a secondary residence. This will factor into how much tax you potentially pay. How much can you expect to pay? That depends entirely on what you do with the inherited property, and this is why appraising the property is so important.

What Utilities Do I Keep Running?

Track down all of the utility accounts, and cancel the ones that aren’t necessary. Keep the electricity, heat and water running. Be sure to update the homeowner’s insurance policy. Contact the insurance company immediately, because it can potentially lapse if the house is unoccupied. It’s also a good idea to change the locks to make sure the property is secure, just in case someone you may not know has a copy of the house key. Other things to consider would be arranging upkeep around the property, and dealing with the belongings left behind.

What Taxes Do I Pay on Inherited Property?

Capital Gains Tax on Inherited Real Estate

Capital gains tax is considered taxable income in Canada and this is what you’ll pay on the profit of the sale of the property. You will be taxed on the “Fair Market Value”, at the time of inheritance to the time you decide to sell. It’s important to note that you will be taxed 50% of the capital gain.

Real Estate Inheritance Tax

In Canada, there are no inheritance taxes. Which means you don’t have to pay in order to take over a property. However, you do take over property taxes, repairs, mortgage payments, and insurance. If you have inherited a primary residence, you do not have to pay to have the residence transferred to your name. If it’s considered a cottage or vacation home, you may have to pay for property transfer tax. If siblings share an inherited property, they split the cost of the capital gains tax.

Should I Rent Out My Inherited Property?

If you plan on renting out the property, you’ll need a real estate appraisal. In theory, you would owe capital gains tax on the difference between the value of the inherited home, and the fair market value of the home when you chose to rent the property out. This is changing it from a primary residence to an investment residence. In other words, you will owe on the difference of the inherited value and the fair market value when you started to rent out the property. While renting out an inherited property can provide a steady cash flow, you’ll also be taking on the role of a landlord! One other option before selling is if one or more siblings wants to stay in the inherited home, they can simply rent it from the others.

What Happens When I Sell My Inherited Property?

One benefit of selling shortly after inheritance is that the capital gains tax would be nominal. There would be little difference between the assessed fair market value when you inherited the property and the sale price. The easiest way to calculate the capital gains tax is to subtract the sale price from the fair market value price and 50% of that is how much tax you owe. If siblings have inherited the property and have agreed to sell, they would all have to share the capital gains tax. One important detail is if one sibling wants to sell but the others do not, they are still entitled to sell their share. However, they may have trouble finding a buyer interested in a portion of a property. Keep in mind if you sell the property, and you already own a primary residence, you will be subject to capital gains tax.

What If I Want To Move In?

The most common scenario here is if one inheritor wants to keep the home, the others will have to be bought out in order for them to become the sole owner. If that inheritor buys them out and considers the property their principal residence, they don’t have to pay the capital gains tax.

Do You Need An Appraisal For Newly Inherited Real Estate?

It’s important to note that your own circumstances will dictate whether owning the property is a financial burden or an improving investment. Is it too far away? How much maintenance and upkeep does it require? Do you need the money, or is it a worthwhile long-term investment? Be sure to discuss all options with your relatives, siblings, and anyone else who has ownership.

At D. Fritz Appraisals Inc., our team has over 40 years of experience appraising homes, offering the most accurate valuation according to the market today. Our appraisers are certified, professionally insured and committed to the most precise property valuations possible. Contact us today for an expert appraisal of your newly inherited property.