Have you have inherited real estate in Canada and wondering what to do? It can be confusing especially if you are not the only one who has inherited the property and live in a different city. In this article, we will break down the fees involved and how to manage the inherited property if there is more than one owner.
What Is An Inherited Property?
Inherited property is passed down to you from a family member (parent or relative). In most cases, you receive an inherited property when a family member has passed away, which can make the situation even more stressful and confusing.
If you have inherited a house, it will be called a primary residence, meaning you are considered to live there full-time. You do not have to pay to have the residence transferred to your name. If you have considered a cottage/vacation home, it will be considered a secondary residence, meaning you do not live there full-time and only live there a few months of the year/seasonally. You may have to pay for ownership transfers with a secondary residence.
What Type of Lawyer do You Need?
While you are not required to hire a lawyer to probate an estate, it is often advisable.
As well, to determine which lawyer would be best for your situation will depend on the situation. If you are looking to challenge a will, then it is recommended that you contact an estate lawyer for legal advice. If you need assistance regarding the sale of the property, it is recommended that you connect with a real estate lawyer. Many law firms specialize in more than one type of law and can recommend the correct lawyer for your unique needs.
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What Are The Taxes Involved After Inheriting Real Estate?
In Canada, there are no inheritance taxes, meaning you do not have to pay to take over a property. If you do decide to move in, however, you will take over the property taxes, repairs, mortgage payments (if applicable), insurance payments, etc. If you decide to sell, you will be subjected to the capital gains tax.
Capital gains tax is considered taxable income in Canada and is what you pay on the profit of the sale. You will be taxed on the fair market value at the time you inherited the home/vacation home, until the time you decide to sell. You will be taxed on 50% of the capital gain.
If a cottage was purchased for $200,000 and is now worth $500,000, the capital gain is $300,000 and you would owe taxes on $150,000.
If you have decided to keep and move into the inherited property, as mentioned above, you are going to be in charge of everything that comes with the house. Having a home inspector come will give you an idea of what needs to be updated, especially if it is an older home and there are safety concerns. If you have considered the house your primary residence for the past 2-5 years, you may not be subject to capital gain taxes.
If you decide to rent out the inherited property, you will owe capital gains taxes because you are changing the type of property from your primary residence to an investment property. You will owe on the difference of the inherited value and the fair market value when you started to rent it out. It will provide a regular source of monthly income, but remember you are also going to be taking on the new role as a landlord.
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Other Possible Fees Involved
If you decide to sell, you will have to pay REALTOR® fees, lawyer fees, inspection fees, etc. As well, you may have to pay a probate fee. Talk to a local real estate agent to understand all the fees in selling a home.
A probate fee is a validated will and the administering of the estate. So, although you are not paying transfer taxes, you have to pay probate fees in Canada, and your new estate's assets will be taken into account to determine the amount. Assets include things like:
- Real Estate
- Bank Accounts
How It Is Calculated:
[$5 per $1,000 on the first $50,000 of estate]
[$15 per $1,000 on remaining value]
What To Do After You Inherit A Home?
Before you get started on handling the next steps with your inherited property, make sure you discuss with your relatives, siblings and anyone else who also has ownership. People will want to explore different options and it’s important to get informed on what all the implications are before deciding what is best. We have listed 4 steps on handling an inherited property to help evaluate your options:
Step 1: Contact the home insurance provider
You will want to ensure the home stays fully protected so you will want to contact the home insurance provider. If you have inherited the home due to a death, your home insurance provider will need to be notified of the owner’s death and may need a death certificate for their records. As well, if you had not previously been listed as a named insured on the policy you will want to open a new policy under your name. Even if you decide to sell or you are unsure of how to handle it, getting documents in place is a great first step.
Step 2: Change the locks
Once you have been given full title to the home you will want to change the locks. Keys can easily be spread around amongst family or outside companies and to be extra carefully it is best to change the locks. If you decide to sell, just ensure that all valuable belongings have been removed.
Step 3: Get a fair market value assessment
As soon as you take possession of the house you should get a fair market value assessment. Knowing how much the home is worth right away can help you decide if you would like to keep the property or sell it. Contact a home appraiser or a reliable real estate agent to provide you with advice on this step. Find a local real estate agent on Fivewalls to make sure you get a qualified professional. Every agent on Fivewalls works full-time and has verified transactions and reviews.
Step 4: Continue maintaining the home
It is important that you continue to maintain the property. This means looking after the exterior landscaping and having yourself or another family member check in on the home weekly, at a minimum. This is also the time to start thinking about what you will want to do with the home.
How to Sell an Inherited Property
If you have recently inherited a property and plan on selling the home, there a few steps you need to take before it can hit the market. First, it is recommended you connect and interview 3 different real estate agents to help you walk through the selling process. Click here to talk our agent match quiz. If there are others who are listed as inheritors of the property they will need to all agree on the real estate agent you choose and the terms of the real estate contract as they will all be required to sign the Listing Agreement. Second, you should be in contact with a lawyer who specializes in real estate law to help you navigate the legal aspects of the transaction.
Keep in mind that if you sell the property, and you already own a primary residence, you will be subject to capital gains tax for the difference between the fair market value from the time you inherited it and what you end up selling the property for. For example, if you inherit a property valued at $500,000 at the time of inheritance, you have to pay capital gains tax when you sell the home for the $500,000 plus whatever you make on the property sale, even if your parents only paid $200,000 for it initially.
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Multiple Heirs To Inherited Property
Unless stated otherwise, you and your sibling most likely both own half of the property. This could be problematic depending on how well you get along. If you decide you want to keep the home, but your sibling does not want to, you can buy them out. Or if you sell, or rent, you would be sharing half of the proceeds.
Keeping track of all records, even dating back when your inherited property was purchased, will be a lifesaver, especially when calculating what you owe for capital gain taxes. If you inherit a house that you decide to sell right away, you may not even owe much in capital gain. It is ultimately up to you what step comes after inheriting. Do you want to sell it or make it your new primary residence? If the house is more expensive than what you currently live in, you may want to consider otherwise.
Inheriting a secondary residence, such as a vacation home, could be more expensive too, but keeping things in the family that have been there for decades is also really important. If you inherit something along with your sibling, work together to figure out how to keep the family vacation house in the family.
What If You Want To Keep The Property But Your Relative Wants To Sell It?
Unfortunately, this situation is very common, especially if there are multiple siblings involved. Unless otherwise specified in the will, each person receives an equal portion of the property. The most common scenario if one child wants to keep the home, they will buy out the others and become the sole owner.
However, in cases where a sibling wants to sell their share and the others do not or cannot afford to buy them out of their share, they are rightfully entitled to sell their share. The remaining siblings are then are free to keep their shares of the home but it’s not easy to find a buyer for two-thirds ownership of a house.
The last option that doesn’t include selling is that if one or more siblings wish to stay in the inherited home, they can rent it from the others.
Can I Rent Out An Inherited Property?
Yes, if you do not want to live in the inherited home, you can rent it out. While renting can be a great way to increase your cash flow, especially if the mortgage is paid off, it can come with its own challenges. Click here to learn more about being a landlord.
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