The tax implications of owning multiple properties during probate

My husband and I signed the papers in 2021 on a holiday townhouse for family. There is always someone living there. I signed the mortgage papers with my husband. When we got to the lawyer, he only had my husband sign the title, saying I did not qualify. He said we would change ownership with lands and titles. I was upset I had my signature on everything but that. I could not understand what the builder was doing.

Anyway, the second family home was only six months old when my husband passed. No change in price. 

Are there capital gains on these two houses?

I am having serious melt downs. I will have to sell my home I live in to pay these taxes.

Plus, neither of these homes we want to sell. All is going into probate. 

Can I redo the mortgage with a change of title to me?

—Jan

(Question has been edited for length and clarity.)

Determining fair market value and capital gains

I am sorry for your loss, Jan. I can imagine this is a difficult time to be worried about all the financial implications of your husband’s death. So, I will try to address the issues you have raised.

When someone dies, they are generally deemed to sell all their assets on their date of death. This includes capital assets like real estate, stocks and other investments that may rise in value over time. The fair market value of stocks, mutual funds and exchange traded funds is easy to determine. The value of real estate, though, may require an appraiser.

Any assets held jointly with a spouse, or left to a spouse by the estate of the deceased, can be transferred at their adjusted cost base rather than the fair market value. 

What this means is that any deferred capital gain can remain deferred and does not need to be taxed on the death of the first spouse.

In your case, Jan, it sounds like there are no capital gains anyway. One property is worth less than you paid for it, and one is worth the same. Only the increase in value is considered a capital gain and potentially subject to income tax, not the entire value.

Deciding which property for principal residence

When you own multiple properties, as long as you ordinarily inhabit them, you can claim any of them as your principal residence. The principal residence exemption does not necessarily apply to the property you live in most often. I assume that you have a home that you own, Jan, in addition to the home that your son lives in and the vacation townhome. 

Generally, the home a taxpayer primarily lives in is their most expensive property with the largest capital gain over time for which they can claim a principal residence exemption. But you can claim the principal residence exemption on your cottage or vacation property, or even a home that you own that is inhabited by your child, like your son’s home. 

You claim the principal residence exemption to have a tax-free capital gain on a home when you sell it or when you are deemed to sell it, including on your death. A couple can only have one principal residence for each tax year after 1981. 

It bears mentioning that if your son’s home was in his name, he could claim it as his principal residence, and you would have your own principal residence exemption to claim. 

Transferring mortgage after owner passes away

I am not sure if he is able to take over the ownership of the home if you and your husband have been paying the mortgage and other costs for the past six years. But if he was, you could sell or transfer it to him, and given the current value, there would be no capital gain. 

It sounds like you have a mortgage on your son’s home, as well as the vacation townhome, Jan. If you were joint on title and on the mortgages, you should be able to continue as you have been, but you should inform the lender of your husband’s death. 

If the vacation property and mortgage were solely in your husband’s name, you may be able to port (transfer) the mortgage into your name. However, you will need to qualify for the mortgage. You should talk to your lenders to make sure you understand the implications of his death, including if you need to requalify for the mortgages now or at renewal.

You should see if there was mortgage insurance on either mortgage. If there was, the mortgage may be repaid by the insurance proceeds. The lender would be able to confirm. 

Probate for joint ownership with a spouse

In terms of probate, you may only need to apply for probate for the assets in your husband’s name alone (not jointly held with you) and did not have a named beneficiary or successor. This may include the vacation property, as well as other assets like, for example, a bank account in his name alone. 

Probate is levied on the value of assets passing through the estate of the deceased and may range from nothing to 1.7% depending on the province or territory and the applicable exemption limits. 

In summary, Jan, there may be no capital gains tax payable as a result of your husband’s death. There may be little to no probate payable. You will have some legal fees to pay to change the title of the properties and settle his estate. And you may need to qualify to take over the mortgage that was possibly just in his name. But it does not sound like the costs will be so exorbitant that you will have to sell your own home. 

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.

Read more from Jason Heath:

• Should you loan money to someone who is house rich and cash poor?
• The tax implications of transferring a stock between spouses
• Buying a home after divorce
• How do quarterly income tax installments work?

About Jason Heath, CFP

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.

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