Have you inherited real estate in Canada and are lost about what to do? Inheriting property can be overwhelming, especially if you are not the only one who has acquired the property and you live in a different city.
But don’t worry! Figuring out what to do with inherited property doesn’t have to be completely overwhelming. In this article, we will look at how to deal with acquired property if there is more than one owner.
What Is an Inherited Property?
An inherited property is passed down to you from a relative, such as parent or relative. Usually, this happens when that relative passes away, which can make the circumstance all the more emotional and stressful.
If you inherited a home, it will be regarded as a primary residence, meaning you are considered to live there full-time. In this case, you don't need to pay to have the property moved to your name or title.
If you inherited a cottage/vacation home, it will be considered a secondary residence, which means you don't live there full-time and just live there occasionally. You may need 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 -- which is the legal process for administering the estate -- it is advisable.
To figure out which legal advisor would be best for your circumstance depends on the situation. If you may need to challenge a will, you should contact an estate lawyer for advice. You should also contact a real estate lawyer if you need help selling the property.
What Are the Taxes for Inheriting Real Estate?
In Canada, there are no inheritance taxes, so you do not need to pay to assume title over a property. If you choose to move in, you will assume property taxes, repairs, mortgage payments (if any), maintenance, and other related expenses. Before moving in, hire a home inspector to evaluate the property so you have an idea of what should be updated or repaired.
If you choose to sell, you may have to pay capital gains tax. Capital gains tax is viewed as taxable income in Canada and it is what you pay on the profit of the deal. You will be taxed on the fair market value at the time you acquired the property, until the time you sell. The taxes apply to half of the capital gain. If the house has been your primary residence for as long as 2-5 years, you may not be subject to capital gains tax.
Example:
If a bungalow was purchased for $200,000 and is currently worth $500,000, the capital gain is $300,000 and you would owe taxes on $150,000.
If you choose to lease the inherited property, you will owe capital gains taxes since you are designating the property as an investment property. You may owe on the difference of the inherited value and the fair market value when you started to lease it out.
While the property will provide a passive monthly income, as a landlord you will be in charge of maintaining the property. You must get familiar with your local zoning by-laws and residential tenant act to ensure you are in legal compliance.
Other Possible Fees Involved
If you choose to sell the property with a Realtor on the MLS, you will be exposed to listing expenses, attorney costs, examination expenses, and fees. You may also need to pay a probate fee.
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A probate fee is for validating a will and administering the estate. While you don’t need to pay transfer fees, you need to pay probate fees in Canada. Your new estate's assets will be used to decide how large the probate fee is. Assets considered include things like:
Real Estate
Financial balances
Stocks/Investments
Vehicles
How the Probate Fee Is Calculated:
[$5 per $1,000 on the first $50,000 of the estate] + [$15 per $1,000 on remaining value]
What To Do After You Inherit A Home?
Before you decide what to do with your inherited property, discuss the issue with your family members and any other person who also has ownership. It's critical to understand all of your options in order to avoid entanglement. There are four steps that you should take after inheriting a property:
Contact your home insurance provider
You will need to ensure that the home remains completely insured when title is transferred to your name. Things like dated electrical wiring may have been insurable on the previous policy, but when a new policy is submitted, they may no longer be insurable unless upgrades are carried out.
Change the locks
When you have been given full title to the home, change the locks. Keys are easily duplicated and may have been distributed amongst family, friends, and acquaintances of the deceased. People who were not named in the will, but who feel as though they are “owed” a share of the estate, including valuables inside the home, may also have keys. If you decide to ultimately sell the inherited property, be sure to remove any valuables.
Get an appraisal
When you take possession of the house, you need to know what the property is worth. This information may help you decide whether or not you choose to keep the property or sell it. Contact a reputable local appraiser to find out its worth.
Maintain the property
You will need to continue to maintain the property, including the interior, exterior, and landscaping. Also, outdated items may need to be repaired, replaced, or refurbished in order to increase the property’s value. Sometimes, these updates can be costly and time consuming, especially for certain things like a kitchen renovation.
Are repairs and updates out of your budget? We purchase properties in as-is condition. Find out more here.
Selling an Inherited Property
If you have come into possession of an inherited property and plan on selling the home, there are a couple of steps you have to take beforehand. First, you will need to meet with at least three realtors to understand their services and decide who may be the best fit.
If you inherited the property with other people, you all need to agree on which realtor you work with and the details of the real estate contract. All of the inheritors will be required to consent to the Listing Arrangement, so you will need their input.
Secondly, get in touch with a real estate lawyer to help guide you through the legal aspects of the transaction and avoid potential unwanted surprises.
Also note that if you sell the inherited property and you already own a primary residence, you will have to pay capital gains tax on the inherited property, which is based on how much the property has appreciated since you inherited it.
For example, say you inherit a property from your uncle valued at $500,000, but which the uncle originally paid $200,000 for. You will need to pay capital gains tax when you sell the home on the $500,000 (plus whatever you make on the property deal) instead of on the $200,000 when it was initially purchased.
Multiple Successors to an Inherited Property
Often inherited property is owned equally by multiple heirs. This can create problems if you want to keep the property and the other successor wants to sell it. In this case, you can buy them out and, if you choose to lease the property, you could share the income.
Maintaining all records going back to when the property was acquired is very important - especially when figuring out what you owe for capital gains taxes. If you inherit a house that you choose to sell immediately, you may not owe much in capital gains tax. Your lawyer and/or accountant should be able to advise what is best for you.
Moving into the inherited property and selling your primary residence may also be a viable option so long as you've lived in your residence for more than 1-2 years. Ultimately, it is best to seek professional advice so that you understand the pros and cons of what each option has to offer and how each aligns with any plans that you, your family, and any other beneficiaries may have.
Inheriting a secondary residence such as a cottage, could be expensive as well. The issue is less about the cost to carry the secondary residence and more about keeping the property in the family if it has been passed down for decades. Because of the emotional ties, disagreements can quickly arise. In this case, it is best to discuss with any family members to figure out what the best solution is.
What If You Want to Keep the Property But Your Relative Wants to Sell It?
This is a very common scenario, especially if multiple family members are included in the will. In this scenario, each family member listed in the will may receive an equal portion of the inherited property. The most common solution is for one member to want to keep the home and the others to not. The member who wants to maintain sole ownership will buy the share owned by the others.
When a family member wants to keep sole ownership but cannot afford to buy out the other family members, the family members who wish to sell their share of the property can do so to a public buyer. That said, it is not an easy task to find someone who wants to purchase 1/2 or 2/3 of a property with someone they have never met before.
The last option that does not include selling is if one or more successors wish to remain in the inherited property, they can arrange a leasing agreement with the other family members and pay a monthly rent (or whatever terms you work out). If no one has experience writing a lease agreement, it is a good idea to speak to a lawyer or real estate professional.
Can I Rent Out An Inherited Property?
Keeping the property as a rental is a great way to generate additional income and create cash flow, especially if the mortgage is paid off. It is best to have an understanding of the residential tenancies act if you have no prior experience being a landlord. Contact a real estate professional or consult with a property management company to find out more about the proper way of renting out an inherited property.
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