It’s one of the most common — and confusing — questions homeowners face when a parent passes away: If I already own my own home and inherit my parents’ house, do I have to pay tax on it?
This is an emotional and often overwhelming situation. You may be dealing with grief, legal paperwork, and financial uncertainty all at once. The good news is that in Canada, you don’t pay income tax simply for inheriting a home. But depending on how and when the home is transferred or sold, there may still be taxes involved — either for the estate or for you later on.
Let’s break it down in plain language.
When a Parent Passes Away: How the CRA Sees It
When a person passes away in Canada, the Canada Revenue Agency (CRA) treats it as if they sold all of their assets right before death, even if no sale actually takes place. This is called a deemed disposition.
For real estate, that means the estate is responsible for any capital gains on the increase in value of the property between the time your parents purchased it and the fair market value at the date of death.
If your parents’ home was their primary residence, it’s usually covered under the principal residence exemption, which means no capital gains tax would be owed by the estate on that property. So, in most cases, there’s no tax triggered at death on the home itself — unless it was a rental, cottage, or second property.
If the Executor Sells the Home
If your parents’ will names an executor who sells the property while the estate is still in probate, the proceeds from that sale become part of the estate.
In that case:
- You don’t personally pay any tax, because you didn’t receive the property — only the cash proceeds.
- The estate may owe taxes if there were capital gains from the time your parents bought the home to the time it sold, but that tax would be paid from the sale proceeds before the remainder is distributed to heirs.
This scenario is often simpler, since the executor handles the sale, pays any estate taxes, and distributes what’s left.
If the Home Is Transferred to You
If your parents’ will specifies that you inherit the home directly, ownership transfers to you at the property’s fair market value (FMV) on the date of their passing. That value becomes your new cost base.
You don’t pay tax at that moment — inheritance itself isn’t taxable in Canada. However, any future increase in value from that FMV to the eventual sale price will be taxable as a capital gain when you sell it.
That means if the home was worth $600,000 when your parents passed, and you later sell it for $700,000, the $100,000 gain is taxable — even if the house was your parents’ principal residence. The key point is: once ownership passes to you, the tax responsibility moves with it.
But What If I Already Own My Own Home?
Here’s where confusion often sets in.
If you already own and live in your own principal residence, you can’t automatically claim your parents’ home as your principal residence too. The CRA allows only one principal residence per family unit for each year.
So, if you keep your parents’ home as a second property, rental, or investment, any increase in its value between the day you inherit it and the day you sell it will be subject to capital gains tax.
If you decide to move into your parents’ home and make it your new primary residence, you can then claim it as your principal residence from that point onward. Any gains from that point forward could be exempt, but only for the years you designate it as such.
Capital Gains, Simplified
Capital gains tax applies to half of the increase in the property’s value between the time you acquire it and when you sell it. For example:
- You inherit the home valued at $600,000.
- Years later, you sell it for $700,000.
- Your capital gain is $100,000, and 50% ($50,000) is taxable income.
The actual tax owed depends on your personal income bracket in the year you sell.
Other Estate Considerations
Even if you personally don’t owe tax upon inheriting the property, the estate may have other tax obligations before it distributes assets:
- Final income tax return: The executor must file one on behalf of your parents.
- Capital gains within the estate: If the property value rose significantly, the estate may owe capital gains tax before you receive the home.
- Estate expenses and legal fees: These can be paid out of the sale proceeds or other assets if available.
If the estate’s other assets can’t cover those taxes, the executor may need to use funds from the home’s sale.
In Short
You don’t pay tax when you inherit your parents’ home, but you will be responsible for any capital gains that occur after the home becomes yours.
If the executor sells it before you inherit, you’ll receive your portion of the proceeds tax-free, though the estate may owe taxes first.
This area can be complicated — every family and property situation is unique. If you’re navigating an inheritance, a mortgage renewal, or trying to understand how your financial picture changes after inheriting property, we can help.
Reach out any time at The Local Broker Contact Page to talk through your situation in plain language.
