Inheriting a House With a Mortgage: Your Options in Ontario

Being left a house is welcome news until you learn it has a mortgage. Many beneficiaries ask whether they must take over the payments, pay the loan off, or can walk away from it.

This article explains how the mortgage is generally treated between the estate and the person who inherits the home, the choices that are usually available, and the family law and tax points that can change the picture.

Does the mortgage come with the house?

As between the people claiming through the deceased, the land itself is primarily liable for the mortgage debt. The beneficiary who receives the home takes it subject to the mortgage unless the will or another document shows a contrary intention.

A will that simply says debts are to be paid from the estate does not, by itself, move the mortgage off the home. The testator must signify that intention expressly or by necessary implication. If the will charges land with debts or legacies and does not say how they are to be raised, the person who receives the land may raise the money by selling or mortgaging that land.

Whether the lender requires you to formally take over the loan, or to pay it out, depends on the mortgage contract and the lender. Ask the lender and read the documents before you decide.

Who controls the house until it is transferred

You do not automatically control the house on the day of death. The home vests in the personal representative, who holds it as trustee, and only an estate trustee has legal authority to manage or distribute the estate.

When the home was in the deceased's name alone, the estate trustee registers a transmission application. On a transfer to you, the trustee must state that they are entitled to transfer it, and the transfer must say whether title is subject to spousal rights and that required consents were obtained or none are required.

Your options as a beneficiary

• Keep the home and continue the mortgage, if the lender agrees to the arrangement.
• Keep the home and replace the mortgage with new financing in your own name, which is a matter between you and a lender.
• Sell the home and use the proceeds to clear the mortgage, with the balance distributed.
• Ask the estate trustee to sell the home as part of administering the estate.

Some rules affect a sale. A sale of real property made only for the purpose of distribution is not valid without the required concurrence, which generally means a majority of beneficiaries holding at least half the interests. Where a minor has an interest, no sale or conveyance under the Act is valid without the written approval of the Children's Lawyer or, failing that, a judge's order.

If several people inherit together and disagree, any person interested in land in Ontario may apply for partition, and the court may instead order a sale if it considers a sale more advantageous to the parties interested.

Spouses, families and other claims

A surviving spouse must elect either to take under the will, or under Part II of the Succession Law Reform Act on intestacy, or to receive the equalization entitlement. The election must be filed within six months after the death, and a spouse who misses the deadline is deemed to have taken under the will or intestacy unless the court orders otherwise. A matrimonial home cannot be excluded as gifted or inherited property when net family property is calculated.

Where there is no will and there are issue, a surviving spouse takes a preferential share first, which is $350,000 for deaths on or after March 1, 2021, and $200,000 for earlier deaths. The exception is a spouse who was separated from the deceased at death, who has no intestacy entitlement; separated means living apart because of marriage breakdown for three years, or under a separation agreement, court order or family arbitration award, and still living apart at death. A gift to a former spouse is revoked when the marriage ends by divorce or nullity, unless the will shows a contrary intention.

Dependants may also claim. The court may order support, including possession or use of the home for life or a period it considers appropriate, where adequate provision was not made. A support application generally cannot be made more than six months after the grant of the certificate, but the court may allow a later application for any part of the estate still undistributed. Once the personal representative is served with notice of an application, they must not distribute until the court disposes of it, unless all persons entitled to apply consent or the court orders otherwise. These claims can delay distribution and sale, so ask a lawyer whether any apply.

Tax and what to do next

At death, a person is treated for income tax purposes as having sold all their property just before death, which can create a capital gain or loss on the home. The gain is deferred if the property passes to a spouse or common-law partner, or a spousal trust, and is locked in for them no later than 36 months after death, with tax postponed until the survivor sells or is deemed to sell. The legal representative can elect out of this automatic rollover on the final return, property by property, and if they do, the cost to the spouse, common-law partner or spousal trust is the fair market value at death. If the home goes to someone else, the deemed disposition is reported on Schedule 3 of the final return, and all or part of the gain may be exempt as a principal residence, designated on Form T1255.

The estate trustee should also get a clearance certificate before distributing, since distributing without one can create personal liability for unpaid tax.

• Get a copy of the will and the mortgage statement.
• Ask the estate trustee about timing, valuation and any claims against the estate.
• Contact the lender to learn what it requires from a new owner.
• Compare keeping, refinancing and selling using real figures.
• Speak with an accountant about the final return and a lawyer about any family law or dependant claims.

Frequently asked questions