PLANNING TIP ON SELLING A DECEASED TAXPAYER’S HOME
Generally, capital losses on “personal use property” are disallowed for tax purposes (with an exception for losses on “listed personal property” (LPP) such as art, stamps and coins, which can be claimed against LPP gains).
After a death, however, there is a planning opportunity that can be used to reduce a deceased’s tax bill.
If the deceased owned a home in which no-one else was living at the time of death, and no-one lives there after the death, then the home is not “personal-use property” to the deceased’s estate, because it is not used by the estate or by any beneficiary for their personal use and enjoyment. The CRA confirmed, in a 2011 conference statement (2011-0401871C6), that it agrees with this.
Since the home is not personal-use property, its sale can generate a capital loss. For tax purposes, the estate is deemed to have a cost of the home equal to the home’s value on the day of death. If the home is sold fairly quickly (so that the value has not changed), the costs of the sale, including realtor commission and legal fees, will result in the estate receiving less than cost as proceeds of the sale. The result will be that the commission and legal fees create a capital loss to the estate. The Income Tax Act allows an election for half of this loss (the “allowable capital loss”) to be carried back and deducted in the deceased’s final year, thus reducing the deceased’s tax owing for that year.
This can be a useful claim to make if the deceased’s home is sold by the estate without anyone else living there.