Problems with Inheriting a House – What You Need to Know

Problems with Inheriting a House

Problems with Inheriting a House – What You Need to Know

On the surface, inheriting a home can certainly seem like a benefit, adding a big checkmark in the assets column of your personal net worth. However, there are many cases where the inheritance can become a burden, especially if the property is in disrepair and/or the departed’s affairs (as they apply to the property) weren’t in order. While we have provided some information on selling an inherited house here, we are going to dig deeper for those of you who are concerned about all that may come with being bequeathed a home.

5 Ways Inheriting a Problem Home Can Cause You Financial Stress

1. The Direct Cost of Inheriting a Fixer-Upper

If you’re reading this, there is a good chance that the house you inherited is in some sort of disrepair. Whether you plan on taking up residence within the property, renting it, or putting it up on the local real estate market, you will need to take on the expense of renovations to make it suitable for all of the above. Sure, there are some tips to improving the condition of a problem home’s interior (here) and exterior (here) but these are mostly surface level makeovers and will certainly not be enough to accommodate renters if you plan on using the home to generate revenue. In fact, the homeowners’ insurance policy may explicitly require that you improve the condition of the property to meet certain standards.

2. The Pain of Capital Gains

In Winnipeg MB (and all of Canada for that matter) a capital gain is deemed to be a type of income, and is therefore taxable. While the mere act of inheriting a home is not considered to be a capital gain, it can become one down the road. If you “sit” on the property for awhile, and decide to sell it at a future date, any increase in value of the home that occurs over the time that you have taken ownership to the date of sale, will be a profit. That profit equates income to Revenue Canada.  For example, if you’ve inherited a house with a current market value of $200,000, and you sell it one year from now when the value increases to $225,000, you are looking at a capital gains tax on $25,000. With median home prices in Winnipeg on the rise, this scenario is highly likely.

3. Additional Taxes

While there is no inheritance tax on beneficiaries in Canada, there are other taxes to consider.

Income Tax – One of the first things that beneficiaries consider is to put the inherited home up on the renters’ market so that they can use it to generate revenue. On the surface, this makes sense, but there’s more to consider. For one, there is the aforementioned (as per item #1 above) investment in renovation, repair, and insurance. And that’s just to get started. You will then take on the financial burdens of maintenance and general upkeep. But what will really change the game for your financial state of affairs, is the tax that will come from this new monthly source of income. You will want to have your accountant take a good hard look at how the plan may significantly alter your tax bracket and what you will be paying to the government from here on in.

Property Tax – This one is pretty straight forward and on the tip of everyone’s tongues at press (May 2018) as The City of Winnipeg mailed 231,000 property tax bills earlier this month, with a “pay by” deadline of June 29 (for 2018). You now own an inherited property, and while you may not have to worry about capital gains tax at this time, you will have future property taxes to contend with, and thus with each passing year you will have to factor this into your budget. The general level of property tax is set out in the city’s annual civic budget. The tax burden is then allocated to property owners based on the assessed value of their properties. For the current year, Winnipeg’s general municipal property tax rate is 1.5012 %.

4. Legal and Probate Fees

In Manitoba, a lawyer who is retained by a personal representative on behalf of an estate is entitled to the legal fees authorized by the Queen’s Bench Rules. That’s one expense you will have to contend with. But there are also probate fees.

Probate fees are based on the value of the estate assets (the home, in this case) at the time of death. On a $200,000 real market value home, you have an immediate probate expense of $1400. Use this Government of Manitoba probate fee calculator to find out what you will owe so that you can take ownership of the inherited home.

5. Inheriting a Mortgage

In most cases, an inherited home is one that has already been paid for. You make make this assumption when hearing the news that you’ve inherited a property, however, you will want to investigate the fine print. The deceased may have taken out a second mortgage, or there may simply be a remaining balance due on the property that the remaining estate does not cover. If you are about to inherit a home that comes with a debt, you don’t have to accept it. That being said, you could be missing out on an opportunity. Assuming that your financial standing is strong enough for the lender to allow the mortgage to pass to you, you will be inheriting a new monthly expense that will continue until the mortgage is paid off. Are you prepared to take this on? There is no clear cut solution here, but it’s something that you need to be prepared for when an inherited home is on your horizon.

As you can see, there are some significant financial issues that can arise here, but the good news, is that you can turn these financial concerns into a real money today (mortgage conditions aside), by using the services provided by 5 Day Cash Offer to release the burden of your inherited home. Learn more about how it works, or simply contact us today to learn more.