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Monday, June 10, 2013

Transferring property among family members - a potential income tax nightmare

I get an awful lot of questions about tax on this blog which I can't and don't answer because I'm not an accountant. It's nice that people think we lawyers know everything, but we don't. Accountants know different material than lawyers, and because of that I sometimes have to tell commenters on this blog that they'd be better off asking an accountant their questions. It's not that I'm unwilling to answer questions, but you need to hear information from experts in specific fields.

Many of the questions have something to do with tax on the disposition of the parents' home. Why people are so darn quick to transfer their home or some portion of it to someone else without knowing the consequences, I'll never understand. But transfer it they do, and that results in all kinds of issues from legal to tax to family dynamics.

I recently came across an article from Mark Goodfield, a Canadian accountant with more than 25 years of experience and whose blog is called www.thebluntbeancounter.com . In the article, Mr. Goodfield talks about the tax consequences of inter-family transfers of property. I strongly suggest that those of you who have added your children's names to your home or your investments read the article by clicking here.  I think you might be in for a surprise in terms of the tax problems you may have created for yourself or your kids.

16 comments:

  1. My family experienced this particular income tax nightmare while trying to transfer my grandmother's house to my uncle. It turns out there was an IRS tax lien on the property that she was not even aware of. We sought the help of a reputable tax service to release the lien, and my uncle is currently in the process of having the lien withdrawn. I agree that everyone experiencing tax issues such as these should seek out a professional, though I must say the information you have provided here is helpful-- despite the fact that you are not an accountant!

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    1. Hi Jess,
      Nope, I'm no accountant, though I think being one would help me answer a lot of the questions my readers ask!

      Lynne

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  2. I agreed to an Out of Court Settlement of the family home, but did not agree to lift my lien for Committee duties and services to the deceased. The Court appointed Administrator is now threatening to resign if I do not lift it. What are my rights?

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  3. My father recently passed away and has left his half of a recreational property to her, she is not interested in the property and may wish to sell it....I understand she would then pay CG's on the transaction - my question is, if she were to gift this to me and I in turn sold it - would there be a benefit in a lower CG?
    Two interests here, keeping the CG low for her taxes and for me to obtain the property.

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  4. Hi Lynne
    Say a person wills his home to beat split between his 3 children. None of them want the house so it needs to be cleaned up and sold. However one of the children is squatting in the house and won't leave. Has never paid rent or utilities. How can the other 2 children get him out so they can prep the house for sale?

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    Replies
    1. That's the job of the executor. Unless the other children are the executor, they should step back and let the executor do it. Give the child who lives there a notice as if he or she were a tenant, giving a deadline. Go ahead with the probate. If necessary, enlist the help of the local sheriff to get the squatter out.

      Lynne

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    2. Thank you Lynne this is very helpful!!

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  5. Our home is in both my husbands name as well as mine. He is disabled and will have to go into a nursing home at some point and it will have to be subsidized because we have no savings. I am aware that the government will be taking ALL of his earnings (disability and CPP) which leaves me with nothing to live on. If the house is in my name only, will the government take 1/2 the house once it is sold?

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    1. Hi Solomino,
      You haven't said which province you're in, but the general rule is that the government will not take the home (or make you sell it) when a spouse lives there. It shouldn't matter whether it is in both of your names or just in yours.

      If you sell the house while it is in both names, yes they might take half the proceeds, depending on the timing of the sale and the timing of going into care.

      They generally try pretty hard not to displace a spouse when they place someone, so I would be surprised if they took all of his income when you are also dependent upon it.

      This is a scary time, I know. I would suggest that you both get Enduring Powers of Attorney in place as soon as possible so that you have the authority to deal with assets in the future as needs and abilities change.

      Lynne

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  6. Hi Lynne,my issue is my wife's Father passed away 3 yrs ago ,leaving his eldest daughter as Executor of his will,she never bothered to probate the will which I advised her to do,now he left his house and property to his 5 children, one of them being my wife,the other 4 siblings didnt want the house ,so they had papers drawn up to transfer the house to my wife and her son,thing is the executor never had the the proper steps taken to transfer the deed,now she has washed her hands of her duties and my wife has to pick up the pieces and endure any costs associatedwith getting the deed transferred in her name any suggestions what steps we need to take,Thanks

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  7. Hello,
    I currently moved to live in USA and I have 2 properties in Alberta. How can I transfer them to my parents? The properties still have mortgages.
    Thank you so much for your help.
    Matilda

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  8. Hi,
    I live in Alberta. My parents bought a house,they paid the down payment but we have carried the mortgage payments for 17 years. The understanding was the house was to come to me. They have now decided to sell it and have asked for another $200,000 on top of what's left owing.We have almost paid it off and don't want to start over.
    Am I owed anything if they force me out and sell it?
    Thanks

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    Replies
    1. You're in a tough spot because the agreement you have regarding the house was never put into writing. This will make it pretty tough for you to try to force them to give the house to you upon your repayment of the mortgage. However, you would be able to say that you were making the payments because you believed the deal was in place ("part performance" of a contract).

      If they sell it, in my opinion they should be reimbursing you for the mortgage payments (and any other money you put into the house, such as repairs or improvements). Otherwise, they are profiting off you unfairly. In law, this is called unjust enrichment. It's certainly not an easy fight, but it's worthwhile to pursue after 17 years of paying a mortgage.

      It is very rare for families to put this sort of arrangement into a written document, so you're certainly not alone there. I wish, though, that more families would read stories like yours and realize how valuable it would be to put it in writing.

      Lynne

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  9. Good morning Lynne, myself, and my brother bought a house 15 years ago for $240,000. We lived in it together with 4 other roommates for the first 5 years, and then just me and the roommates for the last 10 years. He wants out of the arrangement, and his name off the house title for liability reasons. The house was appraised at $325,000, but the house tax assessment is $400,000. We decided I would buy him out at the professional appraised $325,000, there is only $90,000 left on the mortgage. How would I go about with the transfer? What would the cost be? It's his second home, my primary, so I know he'll have to pay capital gains on the house appreciation. Would it be on the appraised value (the one we agreed upon) or assessment value? I assume he would only pay on his half? (Bought for $240,000 - down payment of $40,000. house assessment of $325,000 - $240,000 = $85,000 divided by 2 is $42,500 for his capital gains tax...correct. Also I assume I would have to pay transfer tax on the whole value. Thank you in advance for taking your time to answer my question :)

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  10. Hi Lynne, my grandmother is moving from her house into a nursing home. As my father and uncle built her house she had both their names on the deed. Should one brother pass, full ownership goes to the other. My father wants to transfer his half to my name. And I eventually want to buy my uncle’s portion. What is the best way to do that in the province of PEI, without creating a tax nightmare? Thanks in advance.

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    Replies
    1. So when you say it's your grandmother's house, you say that because she lives there, even though her name is not on it? And the house is jointly owned by her two sons. I also assume that neither of her sons lives with her and that they own other houses in which they live with their families.

      Two comments:

      The arrangement you have described is joint ownership with right of survivorship. In a case like that, your father cannot transfer anything to you unless his brother agrees. People think joint ownership means half and half, but it doesn't. One person cannot change the title unless the other one agrees to it.

      Secondly, if I am right on the facts as I mentioned above, there will be capital gains tax on the property if it increased in value during the time your father's name was on it. There is no way to avoid that. Your father has to declare any such gain, then use whatever deductions he can to reduce it.

      Unfortunately, many people take lots of legal steps without asking for legal advice. A tax hit is one of the consequences. Not much you can do at this point.

      Lynne

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