If you’ve inherited property, you may wonder what comes next. Mindi Banach, Tax and Estate Planner, TD Wealth, joins Kim Parlee to dig into the tax implications to keep in mind if you choose to move into it, sell it or rent it out.
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* Today on Ask MoneyTalk, we answer a question we're hearing around inheriting a home. Mindi Banach, Tax and Estate Planner at TD Wealth, joins me now to weigh in. Mindi, here's the question -- I've inherited the family home. I'm the sole beneficiary. Now what?
* So the first thing you got to do is you got to look out for all of the documents that you're going to need to gather all the information you need-- the property deed, the will, any existing mortgage documents, the property taxes. Now, it can be a challenge. You know, where do you find these documents? So one suggestion is, first, look in the home that you just inherited. Is there an office where the person stored their important documents or another place that you know where the deceased, again, stored their important documents?
- If that doesn't work, did the deceased have a safety deposit box that they stored their important documents? You may want to reach out to the deceased's lawyer or their accountant. They may have copies of some of these documents. And lastly, you may want to look at the local courthouse or the land registry office.
- After you understand what the documents state, what your financial information is, what you-- you can assess the situation, the next step you've got to determine is, well, what are you going to do with this property now that you've inherited it? Are you going to keep the property? Are you going to sell the property? Are you going to rent out the property?
- It's really going to depend on each client's own unique facts and circumstances. But the factors that are going to influence are your own financial circumstances, your long-term investment goals, and whether or not you have an emotional attachment to that property. Ultimately, you want to gather enough information so that you can weigh all your options and make the right decision for you.
* All right, well, let's go through some of the options that are available to people. So if you decide to keep the home and move into it and live into it, what are the tax implications?
* So I want to clarify a common misconception that I tend to see, and that is, when a beneficiary inherits assets, there's not going to be an immediate tax implication for the beneficiary. You may need to look for the deceased's estate. There may be a tax implication there. Specifically with a home, it could be dependent upon how the deceased used that home, meaning whether or not that deceased used that home as their own principal residence.
- But if a beneficiary inherits a home, again, I want to highlight, no immediate tax implication when they inherit the home. But there could be a tax implication in the future. So when the beneficiary ends up selling the home or the beneficiary passes away, if there's been any appreciation on that home from the date that they inherited the property, meaning the date that the deceased passed away, until the date, again, that the beneficiary sold the property or the beneficiary passed away, the beneficiary may be subject to any taxes on that gain, unless the beneficiary can designate that home as their own principal residence, eligible for the principal residence exemption.
* Got it. OK, now let's talk about, then, what that beneficiary decides to do. So again, I inherit a home. I decide not to live in it. I decide to sell it. What then?
* So again, when you inherit the home, no immediate tax implication, but there could be a tax implication when you sell the home. It's going to be dependent on whether or not the beneficiary-- how they used that home between the time frame of when they inherited the home, the date that the deceased passed away, the date that they sell the home, if there's been any appreciation. If the beneficiary used that home as a principal residence, they'll be able to shelter the gain under the principal residence exemption. If they didn't, at any point, use it as their principal residence, then they will be subject to taxes on that gain.
* And then the other scenario, I guess, is that if you decide to keep the home, not sell it, not move into it, but actually decide to make it income producing and rent it out.
* So the rent that you receive, you will have to report that on your income tax return. There are certain deductions and expenses that you will be able to deduct, but it's going to be dependent on your own contingent circumstances. You can typically deduct property management fees, maintenance fees, property taxes, mortgage interest expenses. But you really also need to look into the 2023 Fall Economic Statement, because the government did propose to deny certain expenses, including interest expenses -- expenses related to earning short-term rental income in provinces and municipalities that have prohibited short-term rentals. So got to look into that.
* Short-term rental, long-term rental, all the things you need to be thinking about when you're doing this.
* Yes.
* Probably someone is listening to this, frantically writing down every single thing you're saying. But I guess the bottom line is you need to speak to somebody professional or maybe a few different professionals to decide what actually makes sense for you.
* Yes. There's a number of different professionals in various different fields that you may want to consider consulting. So tax professional, lawyer, accountant, they can help advise you about your legal compliance and any tax benefits that you may or may not have. You want to consult with a real estate lawyer. They're going to be the ones who can help you transfer that legal title. So if it's in the name of a deceased party and you now need it into your own name, they can help you with that transfer and the title changes. They can help you with tenant rental agreements and things of that nature.
- And if you do decide to rent out your property, you may want to be consulting with a professional property management company. They can deal with the day to day management of tenants, collecting the rent for you, dealing with the maintenance--
* At a cost.
* Yes, but still beneficial. You want to consult with, again, a number of different professionals so that they can give you the right tailored advice and you can make the right decision based on your unique circumstances.
* Great insights, Mindi. Thanks so much.
* My pleasure.
* That is Mindi Banach. And if you have a question, we would love to hear from you. Send it to moneytalk@td.com.
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* So the first thing you got to do is you got to look out for all of the documents that you're going to need to gather all the information you need-- the property deed, the will, any existing mortgage documents, the property taxes. Now, it can be a challenge. You know, where do you find these documents? So one suggestion is, first, look in the home that you just inherited. Is there an office where the person stored their important documents or another place that you know where the deceased, again, stored their important documents?
- If that doesn't work, did the deceased have a safety deposit box that they stored their important documents? You may want to reach out to the deceased's lawyer or their accountant. They may have copies of some of these documents. And lastly, you may want to look at the local courthouse or the land registry office.
- After you understand what the documents state, what your financial information is, what you-- you can assess the situation, the next step you've got to determine is, well, what are you going to do with this property now that you've inherited it? Are you going to keep the property? Are you going to sell the property? Are you going to rent out the property?
- It's really going to depend on each client's own unique facts and circumstances. But the factors that are going to influence are your own financial circumstances, your long-term investment goals, and whether or not you have an emotional attachment to that property. Ultimately, you want to gather enough information so that you can weigh all your options and make the right decision for you.
* All right, well, let's go through some of the options that are available to people. So if you decide to keep the home and move into it and live into it, what are the tax implications?
* So I want to clarify a common misconception that I tend to see, and that is, when a beneficiary inherits assets, there's not going to be an immediate tax implication for the beneficiary. You may need to look for the deceased's estate. There may be a tax implication there. Specifically with a home, it could be dependent upon how the deceased used that home, meaning whether or not that deceased used that home as their own principal residence.
- But if a beneficiary inherits a home, again, I want to highlight, no immediate tax implication when they inherit the home. But there could be a tax implication in the future. So when the beneficiary ends up selling the home or the beneficiary passes away, if there's been any appreciation on that home from the date that they inherited the property, meaning the date that the deceased passed away, until the date, again, that the beneficiary sold the property or the beneficiary passed away, the beneficiary may be subject to any taxes on that gain, unless the beneficiary can designate that home as their own principal residence, eligible for the principal residence exemption.
* Got it. OK, now let's talk about, then, what that beneficiary decides to do. So again, I inherit a home. I decide not to live in it. I decide to sell it. What then?
* So again, when you inherit the home, no immediate tax implication, but there could be a tax implication when you sell the home. It's going to be dependent on whether or not the beneficiary-- how they used that home between the time frame of when they inherited the home, the date that the deceased passed away, the date that they sell the home, if there's been any appreciation. If the beneficiary used that home as a principal residence, they'll be able to shelter the gain under the principal residence exemption. If they didn't, at any point, use it as their principal residence, then they will be subject to taxes on that gain.
* And then the other scenario, I guess, is that if you decide to keep the home, not sell it, not move into it, but actually decide to make it income producing and rent it out.
* So the rent that you receive, you will have to report that on your income tax return. There are certain deductions and expenses that you will be able to deduct, but it's going to be dependent on your own contingent circumstances. You can typically deduct property management fees, maintenance fees, property taxes, mortgage interest expenses. But you really also need to look into the 2023 Fall Economic Statement, because the government did propose to deny certain expenses, including interest expenses -- expenses related to earning short-term rental income in provinces and municipalities that have prohibited short-term rentals. So got to look into that.
* Short-term rental, long-term rental, all the things you need to be thinking about when you're doing this.
* Yes.
* Probably someone is listening to this, frantically writing down every single thing you're saying. But I guess the bottom line is you need to speak to somebody professional or maybe a few different professionals to decide what actually makes sense for you.
* Yes. There's a number of different professionals in various different fields that you may want to consider consulting. So tax professional, lawyer, accountant, they can help advise you about your legal compliance and any tax benefits that you may or may not have. You want to consult with a real estate lawyer. They're going to be the ones who can help you transfer that legal title. So if it's in the name of a deceased party and you now need it into your own name, they can help you with that transfer and the title changes. They can help you with tenant rental agreements and things of that nature.
- And if you do decide to rent out your property, you may want to be consulting with a professional property management company. They can deal with the day to day management of tenants, collecting the rent for you, dealing with the maintenance--
* At a cost.
* Yes, but still beneficial. You want to consult with, again, a number of different professionals so that they can give you the right tailored advice and you can make the right decision based on your unique circumstances.
* Great insights, Mindi. Thanks so much.
* My pleasure.
* That is Mindi Banach. And if you have a question, we would love to hear from you. Send it to moneytalk@td.com.
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