Reviewed by Mike Kelly
Updated February 15, 2023
Inheriting a home isn’t a common occurrence for most people; it probably only happens once in a lifetime, if at all. When you do inherit a home, the logistics of handling it are probably the furthest thing from your mind.
After all, inheritance usually follows tragedy. It can add a lot of extra stress to an already trying situation. Home insurance, inheritance taxes, capital gains… These are not things one wants to think about following a loved one’s passing.
Understanding the right steps to take with your inherited property can alleviate future issues. Read on for everything you need to know to simplify a stressful process.
Inherited property is that which is passed down from a person to their spouse or descendants after the person passes away. When someone dies, their estate is split up and given to family members or friends. The estate is the sum of a person’s assets, interests, and debts. Upon their death, the estate is placed under the management of an executor (often a family friend or a lawyer) who will settle any of the deceased’s debts and distribute their remaining assets according to their will.
The part of the estate given away to descendants is the inheritance. Inheritance can take the form of investments, cash, personal property or real property (like a house or land).
Inheriting a house is a big deal. The death of a loved one notwithstanding, it can be a very exciting opportunity. Of course, with any large financial transaction, the first thing that comes to mind is taxes.
“Before you inherit a property, you should understand the tax consequences to you,” says Allan Madan, CPA, CA, of Madan Chartered Accountant. “First, you do not have to pay income tax on the value of the property inherited. However, if you sell the property in the future and the property has appreciated since the date of inheritance, then you could end up paying capital gains tax.”
Let’s take a closer look at these taxes.
In some jurisdictions, the inheritor of property has to pay a tax on their inheritance. Fortunately, Canada is not one of those jurisdictions; there is no inheritance tax in Canada.
But do you pay tax on an inherited house?
If the home being inherited was the deceased’s primary residence, there’s no tax on the property transfer at all. If it was a secondary home, like a cottage, there is an estate tax. The estate tax is paid from the estate’s assets, so the inheritor doesn’t have to pay anything.
It’s not an inheritance tax per se, but capital gains tax often comes up when discussing inherited property in Canada. Capital gains tax comes into play if you sell the inherited home, and only if the home increases in value between the time you inherit it and the time you sell it. You’re on the hook for taxes on 50% of the amount of that increase.
For example: you inherit a home with a market value of $300,000. You sell the home four years later for $350,000. The home increased in value by $50,000 while you owned it, so you’re liable for capital gains taxes on $25,000.
Most of the time, you don’t have to do anything. As long as the property you’re inheriting was the deceased’s primary home, the transfer will be tax-free. If it were a secondary home, taxes would be paid by the estate, so the property still comes to you tax-free.
If you plan to sell the home (more on that further down the page), you may need to pay the capital gains tax.
To potentially avoid the capital gains tax, “consider immediately selling the property or move into the property as your primary residence,” says Madan. “When you sell a primary residence, you do not pay capital gains tax on the profits realized upon sale.”
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One of the responsibilities of the executor of an estate is to settle the estate’s outstanding debts, including mortgages. Hopefully, the estate has enough investments or cash to cover the mortgage, in which case you would inherit the home mortgage-free.
If the estate doesn’t have enough assets to pay off the mortgage, then the house itself may need to be sold; not every mortgage lender will allow the inheritor to take over the mortgage payments. Usually, a house can’t be inherited until the mortgage is settled. In cases where the estate can’t cover the mortgage, a family member of the deceased will often buy the house from the estate. Otherwise, the home is sold on the open market.
It’s important to keep maintaining the home. Hire someone to look after the exterior landscaping and either take some time yourself or have another family member check the home weekly, at a minimum. It is best to leave the home looking lived-in rather than vacant. Your insurer will want to know what your plan is for the home. Will you be moving into it? How long will it be vacant? Do you plan to sell it? Once a home is vacant, it can be more difficult to secure coverage. For this reason, it’s best to work with the existing insurer to see what options are available for you to maintain the current insurance.
To ensure the home stays fully-protected, the first thing you need to do is contact the home insurance provider. In the event you inherit the home due to a death, the home insurance provider will need to be notified of the owner’s passing, and may need a copy of their death certificate for their records. If you had not previously been listed as a named insured on the policy, then the home may need to be held in trust of the estate while all the paperwork is sorted and processed. In this case, the legal representative of the estate would be responsible for the policy during this period.
You also want to confirm the method of payment for the policy. Often, the original owner’s bank accounts are closed. If the insurance payments are by preauthorized debit, you may end up having payment failures. Make alternate payment arrangements in advance to make sure that your home stays fully protected.
Once you know when the title of the home is being transferred into your name, you will need to secure coverage as the new homeowner. This will generally mean starting a new policy. You should be able to reference the old policy for some of the information the new insurance provider requires.
It’s also beneficial to get a home inspection so you can be aware of any outstanding maintenance that you’ll need to deal with shortly. This will also ensure that you are fully educated on the home, and will answer any questions about the exterior condition, plumbing, wiring, or any other concerns an insurance provider may have.
It’s also possible that the home is not insured adequately if the existing insurance policy has been in force for some time. The previous owner may have updated the home without updating the insurance policy. It’s essential to make sure that the insured value of the home is adequate for its current estimated rebuild value.
Once you’ve been given full title to the home, change the locks. The previous owner may have entrusted keys to friends, a cleaning service or even a contractor. You don’t need to replace the entire lock; you can just change the pins inside to fit a new key. A local locksmith can assist you. Changing the locks guarantees that there are no spare keys for your home floating around anywhere. Peace of mind is never a bad thing.
Some locks may allow you to rekey them yourself, without the help of a locksmith. If possible, you can check with the builder of the home to see if this is the type of lock they installed. Unless you’re a very handy person, you may want to leave this to the professionals. There will, of course, be a service charge involved, but consider it an investment in your safety.
To make things easier for your heirs, have them listed on the title of the home. Then, things like insurance are much easier to navigate in the future. Make sure all the documents related to your insurance are stored in an accessible place, or give them to the heirs in advance so they don’t have to search for them when needed.
As soon as you take possession of the house, it can be very beneficial to get a fair market value assessment. Knowing this piece of information can save many headaches later on if you decide to sell the home. Capital gains taxes, for example, are based on the home’s fair market value at different points in time.
It often happens that when a parent dies, they leave their house to their children. Unless otherwise specified in the will, each child receives an equal portion of the house. Often, rather than try to manage sharing ownership, one sibling will buy out the others and become the sole owner.
If there is a sibling who doesn’t want to sell their share, unfortunately, there isn’t much that can be done. The share is rightfully theirs to do with as they wish. The remaining siblings are free to sell their portion of the home, but it’s not easy to find a buyer for 2/3 ownership of a house.
Selling isn’t the only option: one or more siblings can live in the inherited home, or they can rent it out and share the income.
With an inherited home, you have three options: move in, sell, or rent.
If your inherited home suits you, just move on in! It’s yours now. If it’s your first time owning a home, take the time to understand all the responsibilities that come with it. We’ve mentioned a few things to think about earlier in this article: get a home inspection and a market value appraisal, and make sure your home insurance is up to snuff. Before moving, you should consider whether or not to use a professional moving company, like MovingWaldo, or complete the move on your own. To get started, visit our comprehensive guide on moving.
If you don’t want to live in the inherited home, you can rent it out. Renting can be a great way to increase your cash flow, but it’s not all sunshine and roses. Sure, you might get lucky and find perfect tenants who stay in the home for ten years, but more often than not, you’re dealing with high tenant turnover and (hopefully not too often) bad tenants.
To alleviate some of the stress, you can hire a property manager to handle the day-to-day affairs of the rental. While it will save you a lot of work, it also eats into your bottom line; expect to pay a property manager anywhere from 6-12 percent of the rent you collect.
There are also tax considerations for rental properties:
“You will pay income tax on the rental profits earned in the year,” says Madan. “A rental property, when sold, is also subject to capital gains tax.”
Finally, if you go the rental route, don’t forget to get yourself a landlord insurance policy.
If you don’t want to live in the home and you don’t want to bother renting it, you can sell it. If you sell right away, you probably won’t owe any capital gains tax, since the value won’t have had any time to increase.
Hopefully, these tips can make what will inevitably be an emotional and challenging time a little bit easier.
Want to learn more? Visit our Home Buying, Selling and Moving resource centre for everything you need to know about real estate, buying a home, or moving. Or, get an online quote in under 5 minutes and find out how affordable personalized home insurance can be.
About the expert: Mike Kelly
Mike Kelly is no stranger to working under pressure, Mike works hard for his clients in the Toronto real estate market while always maintaining a relaxed, low-stress environment. He builds trust with his clients through open and honest lines of communication.
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