Inheriting a House Mortgage

Hearing that you have inherited a home can be exciting news. However, you definitely want to take a look at the fine print in the will to make sure that you don’t have big headaches headed your way. One of the biggest potential headaches can come when the home still has a mortgage or lien outstanding and attached to it. If you accept the house, you might end up having the mortgage attached to you — or you might not, depending on how the transfer has been arranged.

Here’s how it works. If a person dies, all of the property that he owns moves to the estate, as the estate is now the new owner. Most of the time, distribution of assets from a will takes place without debt. This means that the first obligation of a trustee for an estate is to settle any remaining debt. Once that has been taken care of, the trustee can then distribute any remaining proceeds. This means that if the estate has enough funds to settle the remaining balance on the mortgage, then the heir gets the house without any debt.

There is a wrinkle, though. If you put something in your will like “I direct that my house at such-and-such an address will go to my son,” then the executor of the will must distribute that property. There are some cases in which a person can inherit a home that comes with a debt.

If you are the beneficiary in a situation like that, you don’t have to take it. However, you can’t turn down just the mortgage and take the house debt-free. Also, some lenders will not allow an heir to simply assume payments on the mortgage for the deceased party. Another solid option in this case is credit protection insurance.

This sort of policy is a financial planning tool that many people use — even those who have not inherited a house with a mortgage. The purpose of this coverage is to allow you to carry that mortgage forward with greater peace of mind — as well as other credit. If you develop an illness or condition that makes it impossible for you to work, or if you pass away while the mortgage still has a balance, the rest of the balance is taken care of by the insurer. Talking to an insurance professional is the best way to find out whether you should just add more general life insurance coverage or if you need a specific policy for the mortgage debt.

Another tool that is wise for people who are inheriting homes is a title insurance policy for an existing owner. When the property transfers to the heir, there are times when an old claim might resurface and jeopardize your inheritance. When a new claim comes up, the title insurance keeps you from suffering a loss while you wait for the claim to become resolved.

Inheriting mortgages is a trend that is not going anywhere soon in Canada. BMO Investorline recently conducted a survey and concluded that over $1 trillion in property is set to change hands from one generation to the next over the next 20 years. The majority of the recipients are “baby boomers” who are likely to make out well. The average inheritance amount is estimated to be just under $100,000. Not all estates have equal planning or equal distribution of assets, as some are heavy on real estate and land while others are heavy on securities and stocks.

Selling inherited home

A piece of good news for Canadian heirs is that there is no inheritance tax on beneficiaries. It is true that a deceased person’s legal representative does draw up a final tax return and settle any outstanding tax before the estate is settled. When it comes to capital gains, though, there is a tax in Canada. If you inherit a piece of property and sell it at a profit, you will have a capital gain. The Canadian Revenue Agency views these types of investments as capital property. If you sell the asset for more than what you paid, you have to pay taxes on the profit that you made. An exception has to do with the sale of your primary residence. In that case, you don’t owe any taxes on those gains.

Sell inherited home – cont’

So here’s a hypothetical. You currently own a home, but your parents pass away and you also inherit their primary residence. You like the place where you live and decide to sell your parents’ home. However, selling this property is not like selling your primary residence. Instead, the Canadian Revenue Agency views this as a capital gains transaction, and you will be taxed accordingly based on the sale price. The taxes are determined by subtracting what the CRA determines is the Fair Market Value (FMV) from the sale price, deducting any expenses as well. If you are selling the house right after you inherit it, you shouldn’t have to pay much at all in terms of capital gains tax because you’re selling it right at (or near) the fair market value at the time when you inherited it.

In the case of income properties, there are some situations where the CRA rules that they are in a state of deemed disposition. The fact of an owner’s passing and transferring them to someone else (even a relative) is viewed as similar to a sale, and so the heir can still owe income taxes on the inheritance.

In some situations, settling an estate only takes a matter of weeks or months. In other situations, when the planning of the estate was poorly managed, settling that estate can take longer. Even if you and your spouse have set up basic wills, you may want to upgrade those to specify what you want to happen with particular items that you have to bequeath.

Many people receive homes that they were not expecting to. While that can be a boon, it can also be a hassle depending on the situation. Talk to one of our estate planning specialists at Amansad Financial to go over your options — and to decide whether your aunt’s old house is worth it or not.

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