This is a brief overview of the tax consequences associated with distributing real estate from estates. Whether you’re an executor grappling with estate taxation, an estate lawyer seeking clarification, or a CPA considering your options, this note is for you.
Deemed Disposition on Death: What Happens to Property?
On death, the testator’s assets are deemed to have been disposed of at fair market value. This deemed disposition establishes the new cost base for the assets within the estate. While the estate is being administered, the value of these assets can appreciate—which is a particularly relevant issue when real estate is involved.
Real Estate Appreciation in an Estate: A Taxable Concern
For example, say you’re administering an estate where a property has increased in value by $500,000. The adjusted cost base is $3 million, and the fair market value has risen to $3.5 million. Now that the estate is ready for wind-up, what are the tax implications?
Under section 107(2) of the Income Tax Act, property can generally be rolled out to the beneficiaries at its adjusted cost base, which means no immediate tax is triggered.
Using the Principal Residence Exemption in Estate Rollouts
How can this be used to your advantage? Consider the principal residence exemption.
Imagine in our circumstances that a child is living in the family home after the parent passes away. After the parent passes, any number of things may happen: the estate may want to sell the home, the child might want to sell it after receiving it as a distribution, or maybe they just want to keep living in it.
Except in limited circumstances, the estate itself can’t claim the principal residence exemption on behalf of a beneficiary. So, what’s the solution?
Roll out the property. Under subsection 40(7) of the Income Tax Act, when the property is rolled out of the estate, the beneficiary is considered to have owned it from the date the estate acquired it. This allows the beneficiary to potentially claim the principal residence exemption, possibly from the testator’s date of death.
Selling Estate Property With Multiple Beneficiaries
If there are multiple beneficiaries or the estate needs to sell the property before it can be rolled out, options may be limited. However, with careful planning, it’s possible to work out a solution.
For example, if the will permits it, the child living in the home could receive the real estate through a rollout, while the other children might receive loans from that child. Then, once the child sells the property, they can repay the other beneficiaries.
Next Steps
If you have questions about estate administration or estate planning in general, please reach out to one of our experienced lawyers in North Vancouver today.
