Capital gains on inheriting a house and selling it right away

[justfiona]

Hi,
Thanks for letting me in. This is my first post.
My dad passed away in January and the house and a few other things are in probate. Probate was filed a few weeks ago. My estate lawyer said I should check, but he believes that if I sell the house quickly, I won't have to pay capital gains. The valuation of the house that we sent in when filing probate is $200k lower than what I've just sold the house for (the sale has a probate clause), because the RE market is crazy in Toronto. Is it true that I won't have to pay capital gains by selling the house right away? The actual ownership won't take place until a week after probate, but the agreements have been signed and a deposit received. I believe that my lawyer will have to notify the probate court that the valuation was incorrect, but I'm not concerned about the 1.5% probate tax as much as I am capital gains if the court doesn't accept this correction.
Thank you! :)

[cool7hand]

I'm not sure I understand. Are you proposing that the estate sell the house and then distribute the proceeds to you? Or that the estate transfer title on the house to you after probate and then sell the house quickly to avoid capital gains tax? The former sounds right, but the latter sounds sketchy. And your state's law also could be a factor. I'd pay a professional to make sure.

[Dicey]

Sorry for your loss, @justfiona. You've done well to find a buyer and let the property go. You literally can't sell it a moment sooner, do you have probably done all you can to minimize taxes. If you have to, pay 'm and forget 'em.

Hiwever, since you didn't keep the property for any significant amount of time, it could help prove that the valuation was clearly incorrect, which might give you some recourse. Only you can decide if pursuing it is worth your time and life energy.

Oh, and welcome to the forum!

[ThreeWheeler]

You will likely pay some capital gains when you sell the house. The primary factor will be if the appraised value for probate was in line with the current market values or not. Ideally the appraised value for the estate would have been as high as possible. This would have protected most of the capital gains as the home was your father's primary residence. It would have increased the estate taxes but that is minor compared to capital gains.

To put it simply, the government makes sure they always get their taxes. Here is a simple example.

Scenario 1:
Original Home purchase Price: $100
Appraisal for Probate: $200
Sale Price: $300

$100 of capital gains is protected as it was the deceased primary residence, you are taxed on $100 of capital gains.

Scenario 2:
Original Home purchase Price: $100
Appraisal for Probate: $295
Sale Price: $300

$195 of capital gains is protected as it was the deceased primary residence, you are taxed on $5 of capital gains.

[Goldielocks]

I'm not sure I understand. Are you proposing that the estate sell the house and then distribute the proceeds to you? Or that the estate transfer title on the house to you after probate and then sell the house quickly to avoid capital gains tax? The former sounds right, but the latter sounds sketchy. And your state's law also could be a factor. I'd pay a professional to make sure.

This.

No capital gains if you can show that the home was sold by the estate, prior to transfer to you. I am assuming it was the deceased's primary residence.

You might need to file corrected estate paperwork with the actual valuation, and that might be the reason for the suggestion to act quickly.


The higher valuation in the estate will result in higher probate fees, but that may be minor in your jurisdiction compared to cap. gains taxes (assume $200k x 50% x 50% marginal tax rate..? = $50k tax)
Vs. $200k increase in estate probate x 5% (varies widely by province) = $10k.

[Sandi_k]

Any expenses that are incurred to sell the house - including realtor fees, paint, rehab - are deducted from the sale price. The appraised amount is then deducted from that net sale proceeds. It's likely that there will be little to no profit, and thus little to no capital gains tax.

But this is unknown, given the current heated RE market.

[daverobev]

'Market is crazy' -> gain occurred after death -> taxable, I would say? I'm sure you can make an argument that the value in probate was wrong if local numbers support that - if local numbers generally show a 5% rise from Jan-Apr and this is a 30% change then you can argue the probate number was too low. But if the bump is in line with other houses in that timeframe, it seems fair.

I am very much not a lawyer, of course.