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Sunday, April 7, 2013

How do you place a value on a principal residence inherited from your parent?

This reader sent me a question asking about placing a value on a home that is being transferred through an estate and not being sold. The key to placing the correct value is getting an appraisal. Here is the question:

"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."

Yes, a property in an estate should always be appraised before it's transferred. While the person who receives the property may not think of getting an appraisal, the executor should make it his or her business to think of it. The value should be fair market value, or in other words, what a seller could get for that property on the open market.

Let's just work backwards through the process for a moment. In order for that residence to be transferred from deceased father to a beneficiary child, there will have to be a Grant of Probate (or administration) issued. No land titles office is going to transfer a home owned by a person without that person's signature, or a Grant of Probate. In order to get that Probate, the executor has to put together an inventory of the deceased's estate. That inventory must contain values of all assets, which the executor swears under oath to be accurate values to the best of his knowledge.

So, at that time, the executor would have assigned a value to the residence. This is where the appraisal comes in.

After the Grant of Probate has been issued by the court, the executor will take steps to transfer the title to the beneficiary. He will complete and sign documents at the land titles office. The person receiving the property will also sign some documentation and in most jurisdictions he swears to the value of the property. This assigns a value to the property that will be recorded in the land titles registry. This would likely be the same value as was shown in the inventory in most cases.

I've seen a number of cases where the executor is trying to be sneaky and places a really low value on the property as a way of keeping probate fees lower. In the end, this may create a problem for the beneficiary who inherits the property, as the registry may show an artificially low value, meaning that eventually, on the sale of the house later on, the beneficiary is going to have to pay more in capital gains tax. Executors are liable for their mistakes and their negligence so number-juggling seems a bit foolish to me.

The other problem is that when the value is intentionally set too low or too high, and two people have sworn under oath that the value is actually correct, you've got two people who have committed perjury. Why even go there?

2 comments:

  1. I have a question on what has to be accounted for in the estate's assets. My husband owned some things that were stored at his parents place, they both passed away now. Do we have to include his belongs as estate property or not? and does the items that the family takes have to be included in the assets as well? There is no real debt that cannot be covered by the sale of the house.My husband is co-executitor and we are responsible for making up the list.

    ReplyDelete
    Replies
    1. Hi Dee,

      No, items that belong to your husband that were stored in the house are not estate property.

      Yes, items that are taken by family members are included.

      Lynne

      Delete

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