In a previous article, we discussed the advantages of purchasing investment properties, particularly when it comes to having an extra source of investment income for retirement. But when the time comes, who will you leave these investment properties to in your last will?
One key question to bear in mind when planning to leave behind investment property for your children is whether or not they will want to take on the responsibility of owning and maintaining it, especially if it houses tenants. Being a landlord requires attentive upkeep and financial resources, so it’s wise to discuss this with your heirs to ensure that your investment would be left in the right hands. If you’re in Canada, remember that while investment property will not be subject to an inheritance tax, it will be considered a deemed disposition upon your death, therefore subject to capital gains tax even if your heirs do not resell it. This is because, being an investment property, it was not your primary residence.
As with most types of real estate, investment property owned by both spouses as “joint tenants” with right of survivorship will be passed to the surviving spouse automatically upon death. This bypasses the will and the process of probate. It is also advantageous to leave investment property to your spouse when considering taxes. In the US and UK, property left to spouses is typically exempt from inheritance tax, and in the US capital gains tax can be minimized by receiving step-up basis on the deceased spouse’s half of the property. In Canada, investment property transferred to a spouse upon death will only be subject to capital gains tax upon resale or gifting of the property, rather than upon deemed disposition.
There are many situations that may eliminate or complicate the above options. Perhaps your heirs are unfit to take on the responsibility of maintaining the investment property after your death, you’re concerned about sibling conflict when it comes to inheritance of the property, your spouse has already passed away, or you’re divorced. It may, for instance, be prudent to leave the investment property in a testamentary trust with directives that will minimize conflict or allow your heirs to gain control of the property when they’re financially or personally prepared. You could even bequeath an investment property to a registered charity, which can be beneficial for the tax management of your estate. There are always methods to fit your circumstances.Determining who will inherit which assets isn’t an easy process. However, it’s far more approachable when you have a team of specialists to help you manage the legal, financial, and logistical busy work of your estate. To find out how MacMillan Estate Planning can help you, contact us today.