You inherit property

The tax implications of inheriting property depend on the status of the property and your relationship with the deceased.

Primary residence

A dwelling designated as a principal residence will not be taxed.

Income property or cottage

The tax implication for a bequeathed income property or a cottage will affect the deceased, not the heirs.

When declaring the deceased's income when settling the estate, you must take into consideration capital losses/gains, as well as the recovery of depreciation accrued by the deceased on income property.

The one exception is when a spouse inherits a secondary residence or income property - then there is an automatic rollover (transfer) of the property with no immediate tax implications for anyone.

What is depreciation?

Throughout his/her life, the deceased may have used depreciation each year to reduce income from a property and decrease his/her income tax. This depreciation corresponds to a theoretical loss in the property's value.

At the time of sale of the property or the death of the owner, the government recovers this unearned tax advantage granted over the years. This is what is meant by depreciation recovery. The amount is added to any capital gains and taxed.

Whether or not the property is sold, when settling the estate, the tax bill is paid from the deceased's assets except, of course, if the heir is the spouse. If there are not enough liquid assets to cover the tax bill and the heir wishes to keep the property, the liquidator can take out a mortgage of equal value and transfer the property to the heir on condition that the latter assumes the mortgage.

Heirs other than spouses inherit a property with an adjusted cost base equal to the fair market value of the property at the time of the deceased's death. This adjusted cost base will later be used in calculating the capital gains when the property is sold either by the heir or upon his/her death.