If you’ve inherited property in Ontario, there are many potential implications to consider for your taxes and your finances, especially if it was a surprise inheritance and you haven’t had time to properly plan for it. We’ll walk you through some of the steps you need to take.
Step 1 – Get a professional team together
You probably have enough to deal with considering that you have inherited property from someone close to you passing on. Even if you are a tax professional, lawyer, or financial professional, you may need some guidance during this time. If you are dealing with a straightforward situation, such as inheriting your parent’s sole residence, you will likely just need a tax accountant. If there are multiple or commercial properties involved, you may want to add a financial planner and/or lawyer to your team.
While searching for professionals, make sure they have proper accreditation. For accountants, this means a Chartered Professional Accountant (CPA). If you are looking for a financial advisor, look for a Certified Financial Planner (CFP). These designations mean that the professional who holds them has undergone an intensive certification process, and it also means they need to participate in continuous professional development to maintain their certifications.
Ongoing professional development ensures they are always on top of the latest developments in the ever-changing landscape of regulations. Their actions are also regulated and enforced by their respective professional associations, so they will potentially lose their designations if they engage in shady business practices. Simply put, they are more trustworthy and have more training than someone without a professional designation.
Step 2 – Determine if you are going to keep or sell the property
Deciding whether to keep or sell the property can be a tough call. If you are inheriting a treasured family home or cottage, it can be tempting to keep it. This is typically the easiest way to handle an inherited property, particularly if you are the sole inheritor of a parent’s primary residence, and may make sense from a market perspective – real estate prices are on a perpetual upswing. Holding onto a property in the current market to wait for its value to appreciate makes more long-term sense than selling it.
However, if you are not the only inheritor and there are siblings to consider, it may make more sense to sell. Trying to manage a property between a number of siblings can be a difficult venture, and only works if everyone is willing to put in equal money and time to manage it. This isn’t always going to be the case.
Keep in mind that if you sell the property, and you already own a primary residence, you will be subject to capital gains tax for the difference between the fair market value from the time you inherited it and what you end up selling the property for. For example, if you inherit a property valued at $500,000 at the time of inheritance, you have to pay capital gains tax when you sell the home for the $500,000 plus whatever you make on the property sale, even if your parents only paid $200,000 for it initially.
This is where a tax accountant and possibly a financial planner will come in handy – they will help you determine if you should keep or sell the property. If you don’t already own a primary residence, the process will be much easier as you will not be subject to capital gains – however you still need to report the sale of the property on your tax return.
If you have inherited a cottage, and already have a primary residence that you own, you’ll want to talk to a tax accountant about which residence you want to designate as your primary residence for tax purposes. If the cottage is worth more than your house or condominium, this may be a viable option. Generally, three months of residency is all that is required. Talk to your tax accountant to see if this is worth doing.
Step 3 – I’m keeping it and renting it out. Now what?
If you’ve decided that you want to hold on to the property but don’t want to use it as your principal residence, you may want to make some rental income while you are waiting for it to appreciate, particularly if there is still a mortgage on the property.
Consider this seriously before you become a landlord – being a landlord is a part-time job that may require you to take unexpected time away from your full-time job and family to deal with tenant issues. Talk to friends and family who rent out property – at least one of them will have a horror story about dealing with non-paying tenants and other issues. It isn’t something to be entered into lightly.
This is where hiring a property management company makes sense. A property management company will handle all of the pain points for you, without you having to do much of anything. We will vet tenants for you, take care of contracts, and maintain the property if required. We make the process as painless as possible, and it costs a lot less than getting the wrong tenants in who can do damage to the property, not pay rent, and more. Contact us to find out how our property management services work if your property is in the Greater Toronto area.