Real estate is a significant asset; for many Canadians, it represents a significant portion of their wealth. For parents, passing down their real property to their children is a common way to transfer wealth and provide for their heirs.
Real estate gifts can have tax implications, and it is crucial to understand the options available to parents when gifting real property to their children as part of their estate planning. In this article, learn more about planning for real estate, gifting options for parents, and where to find a wills and estates lawyer.
Understanding Real Estate Gifts
Real estate gifts can take many forms, and parents must consider the tax implications of any gift they make. One way to gift real estate to children is through a direct transfer of ownership. This can be done through a deed transfer or by adding the child’s name to the title.
When a parent transfers ownership outright, they relinquish all control over the property, and the child becomes the sole owner.
Another option is to gift a portion of the property. Parents can gift a percentage of the property to their children, which can help to minimize the tax implications of the gift. This can be done through a trust, which allows the parent to maintain control over the property while still gifting a portion of the value to their children.
Tax Implications of Real Estate Gifts
When gifting real property, parents must consider the tax implications of their gift. Gifts are not considered taxable income, but they may be subject to capital gains tax if the property has appreciated since it was purchased.
When a parent gifts a property to their child, the child assumes the property’s original purchase price. If the property has been appreciated, the child will be responsible for paying capital gains tax on the difference between the original purchase price and the current fair market value.
There are ways to minimize the tax implications of real estate gifts. One way is to gift a portion of the property rather than transfer ownership outright. By gifting a percentage of the property, the parent can reduce the capital gains tax the child would be responsible for paying.
Another option is to gift the property as part of the parent’s estate plan. When a parent dies, their estate is subject to probate, which can be costly and time-consuming. By gifting the property as part of their wills and estates plan, parents can avoid probate and minimize the tax implications of the gift.
Gifts and the Principal Residence Exemption
The principal residence exemption (PRE) is a tax break that allows Canadians to avoid paying capital gains tax on the sale of their primary residence. When a parent gifts a property to their child, the child can use the PRE to avoid paying capital gains tax on the property’s appreciation in value.
However, there are restrictions on using the PRE when gifting a property. The child must have lived in the property as their primary residence for at least one year before they can claim the PRE. If the property is not used as the child’s primary residence, they will be subject to capital gains tax on the appreciation in value.
Gifting Real Property through a Trust
One way to gift real property to children while still maintaining control over the property is through a trust. A trust is a legal agreement that allows a third party, known as the trustee, to hold assets on behalf of the beneficiary.
The parent can transfer property ownership to the trust and appoint themselves as the trustee. This allows them to control the property while giving their children a portion of the value.
Several types of trusts can be used to gift real property, including revocable, irrevocable, and testamentary trusts. Each has advantages and disadvantages, and it is essential to consult a qualified estate planning professional to determine which type of trust is best for your situation.
Gifting real property to children can be a great way to transfer wealth and provide for heirs. However, it is essential to consider any gift’s tax implications and consult with an estate planning professional to determine the best course of action. By understanding the options available and planning, parents can ensure that their real estate gifts provide the maximum benefit to their children.
Dreyer and Associates are committed to preserving the best interests of families across the Fraser Valley and the Lower Mainland. We have diverse experience across family law, wills and estates, and residential conveyancing; however, family law remains our focus. Contact us to speak with a wills and estates lawyer today!