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Sunday, November 4, 2018

Do executors who own their own homes incur capital gains tax when they sell estate property?

I recently received and answered a question from a reader but I'd like to chat about it a bit more. It concerns tax, which is never the easiest part of an estate to understand. Here is the question, with my comments following:

"I would like to know if executors sell a deceased property, will the executors be charged taxes as they already have their own property?"

I always have to make a few assumptions when people send it brief questions like this, and in this case I assume the reader is asking about capital gains tax. It appears to be a reference to the general rule that capital gains tax is assessed against the sale of property, with a person's principal residence being an exception to the rule.

The concern seems to be that if executors own their own homes - their own principal residences - then there could be capital gains tax assessed against them for the sale of a property from the estate. There are several rules at work here, but the bottom line is that the executors personally will not have to pay any taxes if it is a usual sale that goes through properly.

The property they are selling belonged to a deceased person and has now been transferred to that person's estate. As executors, they are doing a job, selling the property for the estate. They are not selling their own personal properties. Whether or not there is going to be capital gains tax depends on whether it is the principal residence of the deceased, not of the executors. The executors can own dozens of properties but that has nothing whatsoever to do with the sale of someone else's property.

This is not to say that the residence of a deceased person can never attract capital gains tax. It can. If the executors hang onto the property for a long time - long enough for it to increase in value - then there will be capital gains tax on the increase while it was in the estate. This is because it is no longer the property of an individual who can claim it as a personal residence, but is the property of an estate. Estates don't have principal residences.

If there is capital gains tax assessed against a property, it is still not the debt of the executors personally. They have to use the estate funds to pay the tax, but they don't use their own personal funds. The exception is that if the executors are negligent in selling the property and hang onto it for way longer than is reasonable, the beneficiaries might get annoyed. After all, paying extra tax means the beneficiaries get less from the estate. In that case, the beneficiaries might insist upon the executors paying the tax personally, and they would probably be successful in that claim.

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