How Should You Pass Real Estate to the Next Generation?
Passing real estate to your heirs can be a crucial part of your family legacy, whether that real estate be a primary residence, generational vacation property, or income property.
Passing real estate to the next generation is not as straightforward as leaving it to a surviving spouse who has joint ownership. There are many issues that must be considered.
Tips for Passing Real Estate to Your Heirs
- Document important property information such as mortgage amount, property taxes, insurance, utility bills, regular maintenance costs, and expected near-term repairs.
- Determine the most cost-effective way to pass real estate to your heirs, such as: putting property in a will; placing property in a trust; gifting property in your lifetime; adding heirs as co-owners during your lifetime; or selling property to your heirs. See below for more details on some of these methods.
- Communicate your intentions regarding real estate transfer. Heirs may not want to inherit physical property for personal or financial reasons. They may also have a preference as to how they want the property to be transferred to them. A conversation prior to your passing will go a long way to easing tension for your heirs, preventing unwelcome surprises and help with your estate planning.
Passing on Real Estate through a Will
Simply naming a next-generation heir as the inheritor of your real estate property or properties could have significant tax implications as most real estate, other than a principal residence, will be deemed to have been sold at the time of your death. At that time a market value is struck, and capital gains tax must be paid.
Capital gains tax will have to be paid by your heir(s) if the property was a vacation home, if they convert your principal residence to a rental property or if they sell it.
An additional issue could arise where you have more than one next-generation heir and you leave your residence to one of them. To prevent discord amongst your heirs you will have to make provisions for estate equalization or sale of your property to provide equal payment to your intended heirs.
Putting Real Estate in a Trust
You can put your property, including your home, in a revocable trust that names your children as the beneficiaries. This can reduce taxes payable by your estate and protect the property from creditors and probate fees. However, once you put your property in a trust you can’t take it out.
Gifting or Selling your Real Estate to Your Children
When you gift real estate in Canada, you are generally liable for capital gains tax on the difference between the fair market value on the date of transfer and your original purchase price. Then when the recipient of the gift eventually sells (or re-gifts) the property, they will have to pay capital gains tax on their total sale price or fair market value, as their purchase price was zero. In effect, there is double capital gains taxation on the same property.
It is therefore usually more beneficial overall to sell the property to your family member than to gift it. However, if the property is your principal residence, and/or becomes your family member’s principal residence, it may qualify for the principal residence capital gains taxation exemption.
As always, it is important to seek the advice of a tax expert to determine if selling or gifting your property to a family member is more tax efficient than passing it on via a will or estate plan.
The Bottom Line
Dealing with the tax implications of passing your real estate to the next generation can be very complicated. You should obtain the advice of a financial professional such as an estate planner or tax lawyer to ensure your legacy is all that you wish it to be.
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This content is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this content should consult with his or her financial partner or advisor.