Inherited Property Taxes

[accolay]

I have inherited a share of a small property in Canada with a number of other parties and I'm wondering about taxes in the US and Canada if we sell the property.

As far as I understand capital gains in the US would be assessed at the same rate as my current tax bracket. Is this correct? I am most unsure about Canadian taxes.

Also wondering if anyone knows if there would be any change in property tax rates if we kept the property.

[terran]

I don't know about the foreign aspect, but if you had inherited land in the US it would receive stepped up basis to the value as of the date of death of the decedent, and you would pay tax at capital gains tax rates for any increase in income from the date of death until when you sold it. As long as it was purchased by the decedent at least one year before you sell you would be paying at the long term capital gains rate, if not then short term. I suspect this will also be true in your case, but I don't know, so hopefully someone familiar with the foreign aspect will comment.

[hoping2retire35]

I don't know about the foreign aspect, but if you had inherited land in the US it would receive stepped up basis to the value as of the date of death of the decedent, and you would pay tax at capital gains tax rates for any increase in income from the date of death until when you sold it. As long as it was purchased by the decedent at least one year before you sell you would be paying at the long term capital gains rate, if not then short term. I suspect this will also be true in your case, but I don't know, so hopefully someone familiar with the foreign aspect will comment.

Just to clarify, IIRC, do you maintain original basis if it is gifted to each generation(before death)? So great-grandpa buys some land for $100, gives to son, gives to son, gives to you, you sale for $100k and the gain is $99,900, right?

[pbkmaine]

I don't know about the foreign aspect, but if you had inherited land in the US it would receive stepped up basis to the value as of the date of death of the decedent, and you would pay tax at capital gains tax rates for any increase in income from the date of death until when you sold it. As long as it was purchased by the decedent at least one year before you sell you would be paying at the long term capital gains rate, if not then short term. I suspect this will also be true in your case, but I don't know, so hopefully someone familiar with the foreign aspect will comment.

Just to clarify, IIRC, do you maintain original basis if it is gifted to each generation(before death)? So great-grandpa buys some land for $100, gives to son, gives to son, gives to you, you sale for $100k and the gain is $99,900, right?

https://www.irs.gov/faqs/capital-gains-losses-and-sale-of-home/property-basis-sale-of-home-etc/property-basis-sale-of-home-etc

[Goldielocks]

Capital Gains work differently on estates in Canada than USA.  There is no stepped up basis on death / inheritance of property before taxes are paid.  (excluding some spousal rollovers and Trust situations WRT taxes, but never a stepped up basis without taxes)
This following will depend on if the deceased were american or canadian...   but the canadian side would look like this:

1)  Property Fair Market Value - Actual Cost Base is determined.  (Total increase in value)
2)  Capital gains is this x 50% (per normal)
3)  The estate pays the capital gains at the deceased person's marginal tax rate on their final return.  If there is not enough Cash to pay it, the property or something else needs to be sold to pay the taxes, or the heirs provide cash to prevent a sale.
4)  The property is allocated to the heirs.  No tax to the heirs.  Inherit at the current FMV.

If the deceased is a US citizen, it looks the same, except they would have TAX WITHHOLDING at the US / Canada rate (starting at 15%).  .. E.g., their estate needs to pay the with holding tax of 15% (or more) on 50% of the gains to Canada.   

Then, the estate files the final tax return for the deceased, and claims a FOREIGN TAX CREDIT on the IRS form, in the amount paid to the CDN government, so no double tax.

[CanyonMan]

1)  Property Fair Market Value - Actual Cost Base is determined.  (Total increase in value)
2)  Capital gains is this x 50% (per normal)
3)  The estate pays the capital gains at the deceased person's marginal tax rate on their final return.  If there is not enough Cash to pay it, the property or something else needs to be sold to pay the taxes, or the heirs provide cash to prevent a sale.
4)  The property is allocated to the heirs.  No tax to the heirs.  Inherit at the current FMV.

Wow. That seems like a nightmare scenario due to the likelihood of forcing sale in areas that have had a lot of market growth. So much for holding onto the family home.

[Goldielocks]

Nah, only applies to family cottage, primary residence is exempt from cap gains. Which is also one of the reasons why we don't get to claim mortgages on tax returns on primary residences..
But!
Keeping the cottage by having money for taxes is a good use for permanent or term 100 life insurance.

[accolay]

Thanks! That's great info.

I wish that the taxes were our only problem.