Inheriting a home can be one of life’s most bittersweet moments. On the one hand, it’s hard to imagine a more life-changing and lasting legacy. Receiving ownership of a house means you’ve been given a valuable asset that can put you in a much greater financial position, especially given the ever-climbing real estate prices. As tragic as the circumstances may be, inheritance is often the only path to homeownership for many in the younger generations.
However, such a windfall comes at a cost. Now you find yourself grieving a loved one while facing a critical decision. What will you do with the property?
The Legalities and Tax Implications of Inherited Property
Navigating the legalities of the will is the first challenge. While Canada doesn’t have an inheritance tax, you need to record the fair market value of the home as soon as it comes into your possession. Capital gains can be confusing, but they could eventually come into play. How?
If the house was your benefactor’s primary residence, it is technically exempt from capital gains. However, as soon as it comes into your possession, any increase in the value becomes taxable.
For example, let’s imagine the home is valued at $800,000 when it comes to you. You hold onto the property for the time being. Two years later, it sells for $1 million, giving you a profit of $200,000. 50% ($100,000) of those earnings are subject to capital gains.
What if the house was an income property? The tax implications are more far-reaching if the home was not your benefactor’s primary residence. First, there may be income tax owed on the property before any money can go to the beneficiaries of the will. In addition, capital gains will apply to 50% of the entire profit when you sell it.
Imagine you inherited the house from your parents, who purchased it ten years ago for $500,000 and used it as a rental property. Upon their death, you decide to sell it for $800,000. You have a profit of $300,000, 50% of which ($150,000) is taxable.
Navigating the real estate market as a senior can be challenging, but it doesn’t have to be. Not with resources like the ones below to guide you:
- A Practical Guide To Downsizing
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Should You Sell the Inherited Home or Your Own Home?
Moving into the inherited home as your primary residence is one option that allows you to keep it in the family. As an added bonus, it can help you avoid paying the capital gains tax. If you’re currently renting, this option gets you into the real estate market and saves money on rent. At the same time, you begin building equity of your own.
Another option is to sell your own property and make the inherited home your primary residence. For example, if you have a growing family and the inherited home is larger, this represents the perfect opportunity to upgrade. Or your own house might be worth more, leaving you with extra funds if you decide to downsize to the smaller property.
Your decision will depend on the value of both houses and your personal situation. A local real estate with an understanding of the neighbourhood and current market can guide you to the best choice for your family. Another thing to keep in mind is if you already own a house and decide to sell that one in favour of the inherited home, there may be tax implications. It is best to speak with a lawyer or financial advisor first.
In some cases, holding on isn’t always feasible, no matter how much you would like to. The timing and location don’t always work out, and owning a property you don’t live in can be more work than you realize. Sometimes, selling the inherited home may be the simplest and fastest solution.
The real estate market in Etobicoke can move quickly, but expert guidance can always help you come out ahead.:
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Preparing an Inherited Home for the Market
The decision to keep or sell the home is not likely yours alone. You may wish to discuss your options with your family members and other beneficiaries to determine what is right for everyone involved. If you agree to sell, your next steps are to prepare the home for the market.
Your strategy will depend on how quickly you need to sell the property. For example, selling the house as-is gets the process over quickly. However, taking the time to clean and renovate can often mean you will earn more money once your sale closes.
Going through each room and clearing out your loved one’s belongings can be the toughest challenge of all. Once completed, your real estate agent can help you with the rest.
They will begin by performing a CMA (Comparative Market Analysis) to help determine a competitive price for the current market. This step is crucial since homes that sell quickly usually earn more.
Once you have an idea of what the house is currently worth, it’s time to decide what, if any, repairs to make.
Letting go of a home that has been in the family for many years can be an emotional experience, but you never have to do it alone. Your family can be a source of great comfort and support. In addition, surrounding yourself with a compassionate team of professionals can take much of the weight off of your shoulders during a difficult time.
Do you have questions or need more advice about selling an inherited property or succession planning? We are local Etobicoke real estate agents committed to helping you achieve the best possible outcome. Reach out today at contact@thompsonsells.com or call 416-450-5900 to schedule a friendly consultation.
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