Principal Residence Exemption on an Inherited Home in Ontario

If a parent has died and left you their home, you may be thinking about living in it, keeping it for a while, or selling it. A common question is whether the principal residence exemption can reduce or remove the tax on the sale.

The exemption is a federal tax rule administered by the CRA, but it matters for Ontario estates because the estate trustee and the heirs both have jobs to do. This article explains the basic rules, the forms involved, and the points where an heir should check the details before selling.

How the exemption works in general

The principal residence exemption can shelter the gain on a home from tax, but it is not automatic. For a given year, a property qualifies as a principal residence if it is owned, alone or jointly, it is lived in during the year by the owner, the owner's spouse or common-law partner, or a child, and it is designated.

A family can designate only one home for each year, from 1982 on. The land usually counts as part of the principal residence up to half a hectare. If a property is on a larger lot, the extra land may need separate consideration, so ask an accountant if that applies.

• Ownership: the property must be owned, alone or jointly.
• Occupancy: the owner, a spouse or common-law partner, or a child must live in it during the year.
• Designation: the home must be designated for the year, and only one home per family per year can be.
• Land: usually up to half a hectare is included.

Reporting and designation: the paperwork matters

The CRA allows the exemption only if the sale and the designation are reported on Schedule 3 of the tax return together with Form T2091(IND). Years that are not designated as a principal residence have their gain reported.

For a person who has died, the legal representative uses Form T1255 to designate the deceased's property as a principal residence. An estate trustee who agrees to act is responsible for winding up the deceased's affairs and paying taxes, bills and debts, collecting the assets and distributing what remains. If the parent's home is sold by the estate, these forms are part of the trustee's tax work.

The inherited home: what to confirm before you sell

Several questions come up for an heir, and the answers depend on the facts. The main ones are who owned the home at each point, how long it was kept, who lived in it, and whether the estate or the heir sold it.

For example, if the estate sells the home, the legal representative is the one who designates for the deceased. If you receive the home and later sell it yourself, you would be a person reporting a sale. The rules say a property must be owned and lived in by the owner, a spouse or common-law partner, or a child for a year to qualify. Whether and how your own occupancy, or your time as an heir, counts depends on your situation, and an accountant can confirm how the exemption applies to a later sale by an heir.

It is also worth asking an accountant how the home's value at the time of death should be documented and how it may matter for a later sale. Ask the estate trustee and an accountant how that value is established and documented. Getting an appraisal around the date of death is a common practical step.

Selling quickly after you acquire a home

A separate rule applies to fast sales. A home sold within 365 consecutive days of acquisition can be taxed as business income under the flipped-property rule. An exception applies where the sale was due to a qualifying life event, such as the death of the taxpayer or a related person.

If you inherit a home and sell it within a year, this rule is one to raise with an accountant. The exception for death is in the rule, but whether it fits a specific sale depends on the facts, including who sold, when, and why.

What to do next

Before you move in, rent it out, or list the home, take a few steps to keep your options open and your records clear.

• Ask the estate trustee who owns the home now and who is expected to own it after the estate is settled.
• Get a written record of the home's value around the date of death, such as an appraisal.
• Note who lived in the home and for which years, including any time you or a family member lived there.
• Check whether the lot is larger than half a hectare.
• Ask whether the estate will file Form T1255 for the deceased.
• Keep the dates of acquisition and sale in mind because of the 365-day rule.
• Meet an accountant or a lawyer before signing an agreement of purchase and sale.

Frequently asked questions