What taxes does my estate owe on a rental property I own when I die?

Rental and investment property is subject to a deemed disposition on death at fair market value. Any accrued capital gain (the difference between the fair market value at death and the property's adjusted cost base) becomes taxable on the terminal income tax return. Unlike the family home, rental property does not qualify for the principal residence exemption.

Additionally, if you claimed capital cost allowance (CCA — the depreciation deduction) on the property over the years, a portion of the sale proceeds may be considered a "recapture" of that depreciation, which is taxable as ordinary income rather than a capital gain.

These two items together — capital gains and CCA recapture — can generate a significant tax bill on a rental property held for many years. If the property passes to a surviving spouse, the gain and recapture can generally be deferred under the spousal rollover.

The estate must pay any taxes owing before distributing the property or its proceeds to beneficiaries. Planning ahead — including modelling the expected tax bill and ensuring the estate has liquidity to pay it — is an important part of estate planning for property owners.