Avoiding tax and probate when passing down a rental property
If you own a rental property and you’re trying to reduce taxes and probate upon your death for your heirs, then you’ll need to look at the implications of some of the different options you have available. For instance, gifting a property now would trigger a capital gains tax for you now. The property also can’t be passed to your heirs at a low valuation when you pass and would instead be transferred at fair market value. One solution to avoid probate fees and future capital gains appreciation is to setup a trust. Capital gains taxes would still need to be paid, but there will be no probate fees later on. The downside is that a trust can be $5,000 or more for the initial setup, with $1000/year on-going costs.
- If you claimed depreciation on your rental property over the years, all this depreciation is “recaptured” in the year of sale – or in this case, the year of death. This is taxed at your regular tax rate, which could be as high as 54%.
- Every province has different probate fees payable to validate a will and allow the executors to distribute the assets.
- It’s important to prioritize your main goals. If it’s stopping future capital gains tax from accruing, you may need to incur some tax today. If it’s avoiding probate fees, a trust could work, but you need to figure out whether you want the rental income solely for yourselves or to be available for your heir.
“Consider your own retirement needs first and foremost and then get advice from a professional with strong estate and tax knowledge.”
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