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Wednesday, March 2, 2016

Capital gains tax on the principal residence? Yes, if the tax is incurred while the house is in the estate

When a deceased home-owner dies, is there capital gains tax on the disposition of the property or not? What if the house sits in the name of the estate for a few years? These questions were raised recently by a reader, and since the questions are asked so frequently, I thought I'd share my comments with you. Here's the reader's note:

"I thought that if a home was the deceased primary residence, then the estate does not have to pay capital gains taxes, when the home is sold. After talking with CRA today, I was told that capital gains would have to be reported on a T3 return and any taxes paid from the estate. Aaargh, it is confusing! We have been 3 years in a mess of trying to get my husband's Mom's estate settled and it seems that there are always more questions than answers."

I've been asked this question many times, since tax isn't the easiest information to work with. The principal residence rules are confusing to a lot of people, so you're in good company.

Capital gains tax is a tax on the increase in value of a property during the time you own it. For example, if you buy a property for $100,000 and then sell it a few years later for $150,000, the gain is $50,000. Half of the $50,000 gain must be reported on the personal tax return of the person who owned it when the property is sold. The gain must also be reported if rather than being sold, the property leaves the owner because the owner died. You're right that when a person sells or disposes of their principal residence, they don't have to pay capital gains tax on that property. That's because a principal residence is an exception to the usual capital gains tax rule.

So, when your mother-in-law passed away, the house was transferred from her name into the name of the estate. The transfer of the house was not taxable because it was her principal residence and was exempt, as described in the paragraph above.

The reason you must now pay tax is that the house has been in the estate for three years and apparently it has increased in value during that time. You are confused because you are thinking the house is still tax exempt. It's not. It was only tax exempt when it was your mother-in-law's home and principal residence. Now it's not her home because it belongs to the estate. The estate doesn't have a principal residence.

There are two transactions here. The first was from your mother-in-law to the estate. The second is from the estate to the buyers or beneficiaries. Only the first transaction was tax exempt.

Note that you were told the tax gain goes on a T3 return. That's a return for an estate, not for a person.

In most cases, the house does not stay in the name of an estate long enough to gain or lose in value, so there is no tax impact. Obviously three years is long enough to have incurred a gain, and it was the delay that caused the problem.

I take it you're not working with an estate lawyer or an accountant, because either one would have told you that the house is no longer tax exempt. It sounds as if you're the executor, so I should probably let you know that if you didn't have a really good, unavoidable reason for a three-year delay, and if the beneficiaries are not very accepting of the reason, you could be on the hook personally for the amount payable now in capital gains tax. An executor is always potentially liable for any financial loss to the estate he or she is administering.

5 comments:

  1. Lynne

    You write "An executor is always potentially liable for any financial loss to the estate he or she is administering."

    Is it not common practice for the will to authorize the executor to use their discretion regarding conversion or sale?

    Doesn't that "protect" the executor from liability (in the absence of criminal behaviour)?

    Thanks

    ReplyDelete
    Replies
    1. Yes, it does to some extent. That particular power you mention avoids an executor having to take fire sale prices for assets. However, it's not permission for the executor to take years to wrap up an estate if there is no good reason for it, because the executor's authority must always be balanced against the beneficiaries' right to receive their inheritance in reasonable time.

      Lynne

      Delete
  2. Excellent post.
    There are excellent Executors out there who are being 'stonewalled' by a Beneficiary or Beneficiaries and their Lawyer's.

    ReplyDelete
  3. Hi Lynn, Excellent blog.
    A few years ago my mom put my name and my sister's name on her condo in Surrey, BC (it's fully paid off). She is in a nursing home now. We just sold the condo (still in the 3 names). Do I have to pay capital gains on my portion since my name was added to the title? Also, how do I find out when my name was added? I have been living in the condo off and on for the past year, as this was mandatory for condo insurance purposes. I still have my mail, etc going to my common-law's house. I don't own any other property so do I still have to pay taxes on the amount I made on the sold condo? Any help would be appreciated.
    Jo-Anne

    ReplyDelete
  4. Hi if my mother leaves me her non principal house in her will and I'm currently living in it will I have to pay any capital gains?

    ReplyDelete

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