Inheriting a Home – Knowing How to Sell and More
Canadian homeownership is abundant in every province. However, there might come a time where a property is entitled to the next of kin or close family.
The information below details taxes related to an inherited home property, their management, and other associated stipulations.
What is an Inherited Property?
Many Canadian homeowners undergo plans to give their property rights to immediate family, close friends, or acquaintances. But inheriting a property isn’t without its complications, particularly for the person it’s intended.
An inherited home is simply a residence that’s passed down to someone else at their authority. While done for various reasons, one of the most common being the legal will on the homeowner. The inheritance could come during the unfortunate time of a loved one passing away. For this reason, home inheritance is a stressful experience.
Because of the amount of money needed to maintain two or more residences, selling them is a reasonable option for many Canadians.
What Is Inheritance Tax in Canada?
Any involvement with real estate should be with the expectation of fees springing forth somewhere down the line. But how they’re paid and the frequency of fees can ascertain the total cost of everything, including taxes. Homeowners must pay for their mortgage and the general upkeep of a home. But unlike these responsibilities, property taxes can be a bit tricky to navigate.
There are situations where one may have to pay a higher rate than expected. Other instances could reduce or eliminate the burden of taxes. An inherited house, like any other home under ownership, requires that property taxes remain paid. Based on the route that the owner takes, this inheritance tax is either necessary or entirely exempt.
Under most conditions, Canada won’t tax homeowners solely for being in ownership of inherited property. It’s the options chosen afterward that open up the door to fees.
Primary and Secondary Residences
In Canada, homes that are inherited fall into two categories. They are what determines the amount paid. Classification is predicated on the living arrangements of the person given the property.
A primary residence is a home that’s actively being lived in by the recipient. Spouses homeowners are the general recipients since they’re closest to the last owner. For a resident to fall under this category, they must reside in the property for a majority of the year. It’s also known as a full-time resident. Under this transfer, there are no associated fees to be paid.
Secondary Residences apply to people that won’t reside in a home for most of the tax year. Canada inheritance tax rules mandate owners to pay fees for transfer, though annual tax fees could be lower than a primary resident. For someone with a present living arrangement, this can add a substantial amount of financial responsibility on their shoulders. It’s also a common reason for inherited homes getting sold in the first place.
Some examples of a secondary residence are vacation homes, rentals, and property adjacent to the primary residence.
On the other hand, a capital gains tax is required for the home to finish the sale. People with secondary residences must pay into this, typically if the provider has passed. If the house isn’t sold, the owner could decide to rent out the property or keep it for themselves as a destination for holidays. Capital gains taxes are avoidable if the home is put up for sale.
Capital gains taxes work by charging homeowners 50-percent of the specified gains. For instance, if a home is inherited, renovated, then sold for an increased amount from its initial worth, the capital gains would be its new value subtracted by the previous cost. So if a home valued at $100,000 is later renovated and appraised at $200,000, the capital gains would be $100,000. The 50-percent fee would be a total of $50,000.
Again, these are requisite on the owners choosing to sell the property instead of living in it. No capital gains tax is mandatory. Renting would require it since that’s legally considered a business investment.
Before attempting to sell an inherited residence, the owners should make the necessary preparations to pay income taxes from the funds received after finalizing a date. Selling a home usually increases the income of a seller by a significant amount. It’s recommended that the tax either be paid at the time of the sale or calculated into next year’s filing documents.
How Can I Avoid Paying Taxes on An Inherited Property?
Here are some of the general ways to reduce or outright avoid fees on an inherited home:
- Work with a reputable Realtor – One of the easiest ways to bypass fees is by contacting a realtor. From that point forward, they can assist the homeowner and provide them a less costly route to selling a home and less burdensome in taxes. Provided that a good realtor is in contact, there would be no hidden fees or commissions to pay.
- Sell the Home with the least amount of Assets – The fewer assets there are on the property, the less likely probate costs would become an issue. Probate fees can be expensive, especially on large properties fully furnished with numerous possessions left over by the previous owner. The amount of money totaled in these fees is set by the value of the assets and their accumulation.
- Sell as Soon as Possible – While an inheritance tax is easy to skip over, other taxes and fees from simply keeping an unoccupied property can quickly surface. These can include an increasing annual tax on the property, maintenance costs on general repairs, and even inspections fees. These fees could particularly become an issue if the home is a secondary property. Paying for the upkeep on one home is already trying. Add another inherited into the mix, and a plethora of debt that’s difficult to get out of could easily spring forth.
- Avoid Leasing to a Renter – Renting out an inherited place of residence provides some benefit, mostly to people with no intention of selling. It’s not a route that a seller with no intention of holding on to the house should take. Fees and taxes become ensured from it being a secondary home. But there are other rental costs that one might not expect. Simply advertising the property for rent could entail spending fees. Maintenance must be done, with possible repairs made for legally renting it out. There’s also the unpredictable nature of unknowingly getting an uncompromising renter to lease, one that ends with additional expenses.
- Researching the Options – Much of the stress of acquiring, keeping, or selling an inherited estate decreases by researching the legal requirements and expectations of Canadian inheritance laws. From a superficial standpoint, there aren’t any fees for obtaining a property given by someone else. But diving deeper into the issue reveals that big raises in taxes are largely unavoidable when attempting to go the solo route. A realtor with a good reputation is encouraged. But they also must be researched to find one that offers a fewer number of fees. Commissions may end up making the final costs to sell higher. Furthermore, one with an optional closing date for completing the sale can help get funds from the transaction into a customer’s account quicker.
Many of the undertakings listed above are manageable through the work of good real estate companies and realtors. Some offer their customers the ability to close out the sale themselves, without the recipient spending their own money to do so.
Getting a cash payment on the sold property isn’t uncommon for sellers, a perk that a good realtor can provide. A preliminary offer is viable over the phone or at an in-person introduction with some agencies.
What Are the Rules for Canadian Inheritance Tax
As there are no demands for inheritance fees alone, the most money homeowners must spend on a new property would be property taxes and maintenance fees.
Realtor expenses are a primary component for selling an inherited home, though not with them all. Since realtors assist purchases and sales with their transactions, costs must be paid out to them, usually averaging about 5-percent of their total home value. The fee occurs through either a flat fee or commission.
Depending on the realtor, this percentage might be slightly higher or lower. Furthermore, some real estate agents might charge more according to specific terms laid out before transactions are complete. Then the money is divided between a brokerage firm and the individual realtor.
Real estate agents don’t usually charge by the hour, but lawyers do. Lawyer fees can add up in this situation, but there are some ways to avoid it. A flat one-time price is sometimes offered, especially to lawyers provided by realtors. If this happens, prepared documents are signed and filed with a real estate lawyer, with prior insight from the homeowners on the cost beforehand.
When renting or remodeling, an inspection fee is standard. It includes a thorough scrutinization of a home’s heating, air conditioning, and plumbing. Other features of the house could be checked, such as structural damages to the foundation, attic, and quality of insulation. These are to find the value of a home, inherited or not.
Canada also has state administration taxes, alternatively known as probate fees. They should remain avoided when possible. Probate cost is according to the number of possessions left behind in an inheritance. Estimations can be done online, though there’s no way to tell what the finalized costs would be under the selling is underway. Probate fees are common for people with lots of possessions that pass away and grant their property to someone intending to sell it.
Setting up a trust or title to a trustee is commonly done to avoid probates. Sometimes, this might be impossible to do according to the assets of the previous owner. Investments in stock, vehicles, bank accounts, and electronics could factor into the probate fee.
The fees associated with inheritance are explained in detail with a realtor agent before the home is put up for sale. So while there are no direct taxes on inheritance, a homeowner would still end up spending a hefty sum of money if it isn’t kept.
Lastly, the problems described become minimized with a trusted home buyer. Taking in the service from a trusted establishment reduces or shields the homeowner from most unwanted obstacles, such as the denial of selling a property with outdated fixtures. Ugly or new, the condition with a lenient realtor won’t refuse to assist based on the inherited home’s condition, location, or lien of the previous owner.
Inheritance taxes Canada residences when selling is done through bad realtors that wish to overcharge sellers for every transaction. But this doesn’t have to be the rule.
As an exception, a seller’s assistance should make the transition from inherited ownership to a sold home as easy as possible. Getting out of as many fees as possible should be the result, whether through an assisting agency or other reliable sources. Preventing the government from taxing owners and sellers for the least amount of money is essential.
Receiving an inherited home from a family member or loved one has benefits as well as some setbacks. The characteristics of the realtor chosen to help sell the property can determine the amount of money received after payment and how much goes to the government.
Although a sold home increases the amount of income tax paid, the funds left over, regardless of exemption or not, should be acceptable. Knowing this, it’s imperative that existing beneficiaries of an inheritance, or those expecting to be, conduct a sale through realtors with a good reputation. It could be the difference between paying too many fees or getting a good cash deal after the transaction.