The tax implications of owning multiple properties during probate

My husband passed away in January this year. About six years ago he purchased a home for our out-of-work son, who became a single dad. My husband and I paid all mortgages, taxes, etc., on this home, and still do. The home, bought at $385,000, now sells for $366,000. There has been no gain.

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.

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