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Friday, July 1, 2011

Capital gains tax on homes passing to the next generation

Capital gains tax continues to be something that requires a lot of attention in estate planning. This is another excellent question from a reader that deals with capital gains tax. I'd like to share it with you.


Hi Lynne, You mention that houses passing to children are not taxable. What about houses which pass to a niece and nephew? Is there any difference. I am referring to adults when I say niece and nephew.Both have their own principal residences and would probably rent or sell the houses in question.There are 2 houses in question. One is the decedents principal residence and 1 is a rental property.Appreciate your help. Thanks


The statement "houses passing to children are not taxable" is an over-simplification of what I've said, and isn't accurate. Let me clarify that. There is no capital gains tax on a transfer of a deceased person's home to someone else if that home was the deceased's principal residence. It doesn't matter whether the person receiving the home is a child, niece or nephew, as the key element in the transaction is the fact that it's the deceased's principal residence.


If the house being transferred was not the principal residence but was a cottage or rental property, it is subject to capital gains tax, even if it's being given to the deceased's own children. So  you'll find that the two houses in this reader's question will be treated differently by Canada Revenue Agency no matter who they are given or sold to.


The reader mentions that the niece and nephew each already has a principal residence of his or her own and will probably rent or sell the house they receive, which seems likely. When the niece or nephew sells the house they receive from the estate - whether that is done within months or not until years later - that niece or nephew is going to have to deal with capital gains tax as the extra house is not his or her principal residence. The capital gains tax will apply to any increase or loss in the value of the house from the time the niece or nephew received it until the time it is sold.


These are the general rules of capital gains tax. The reader would probably benefit from a one-on-one discussion with an estate planning lawyer or tax accountant to learn more about how the capital gains tax will affect the situation.

2 comments:

  1. So when you inherit a principal residence from your father, how do you know or who deems what the property is worth at that time, so when you sell it later, you know if it is a gain or a loss. I'm assuming you are supposed to get the property appraised, but that is not always thought of when inheriting property.

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  2. Surviving spouse (mother) and only son lived in a principal residence. Mother suffered a stroke 6 years ago and was transferred to a long term care facility until her death. Her son became Power of Attorney and continued to maintain residence at the principal residence. Upon her death last year, what are the principle residence exemption for the surviving son who has maintained residence at the principal residence during, upon and after her death?

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