Tax on Inherited Property in Ontario: Selling or Keeping It

Inheriting a house in Ontario can feel like two separate events. First, the person who died is treated for tax purposes in a particular way. Second, you become the owner and face your own choices: sell, move in, or rent it out.

This article explains the tax concepts that usually matter at each step. It does not replace advice on your numbers. How a home is valued at death, and what your own starting cost is, depends on the facts and is worth confirming with a lawyer or accountant.

What happens on the deceased owner's side

How the deceased person's tax reporting is handled depends on the estate, so it is worth confirming with the executor, a lawyer or an accountant. If the home was the person's principal residence, the executor or other legal representative uses Form T1255 for the designation instead of Form T2091(IND).

Whether tax is owed on the deceased owner's side depends on how the home was used. If it was solely the person's principal residence for every year they owned it, the gain is usually not taxed because of the principal residence exemption. If it was not, only part of the gain is exempt. How this applies to the estate depends on the facts, so it is worth confirming with a lawyer or accountant.

Your starting figure when you keep the house

As the new owner, you will need a cost base for any future sale. How that figure is set after a death, and what value the estate used, should be confirmed rather than assumed. Ask the executor or the estate's accountant for the value used on the final return and keep it with your records.

Practical steps help later, whatever the rule turns out to be:

• Ask the estate for a copy of any appraisal or valuation of the house.
• Keep records of the legal and transfer costs you pay to put the title in your name.
• Keep receipts for major repairs or improvements after you take over.
• Note the date the house came to you and how you used it from that point.

If you sell later

A capital gain is the proceeds of disposition minus the property's adjusted cost base and any outlays and expenses of selling it. You report it on Schedule 3, and the taxable capital gain goes on line 12700. For 2025 the inclusion rate is 50%, so half of a capital gain is taxable. Check the current year's rate before relying on that for a later sale.

The principal residence exemption helps only if the home qualifies for you. That means you own it, you (or certain family members) lived in it during the year, and you designate it. If you inherit a house you never live in, you cannot count on this relief. If it was your principal residence for only some of the years you owned it, only part of the gain is exempt. When you do claim the exemption on a sale, you report it on Schedule 3 and complete Form T2091(IND).

One more rule can matter if you sell quickly. Profit on a home owned for less than 365 consecutive days can be treated as business income, with no principal residence exemption. The rule does not apply if the sale is due to, or in anticipation of, the death of a taxpayer or a related person. A sale of an inherited home soon after a death may fall within that exception, but it depends on the facts.

If you rent the house out

Rental income is reported on Form T776, with gross rents on line 8299 and the net amount carried to line 12600 of your return. If several siblings inherit together, each co-owner reports their share according to their ownership share.

Current expenses, such as ordinary repairs, are generally deductible in the year incurred, while capital expenses are deducted over time through capital cost allowance. Capital cost allowance cannot be used to create or increase a rental loss. Claiming it also has a cost on sale: if the proceeds take the class's undepreciated capital cost below zero, recapture arises and is reported on Form T776.

If you move into the house after renting it, or move out and rent it, a change in use is generally treated as a sale and repurchase at fair market value. Elections exist in some cases, but they depend on the facts, so get advice before you change how the house is used.

What to do next

• Ask the executor which tax returns are being filed and whether Form T1255 is being used.
• Get the value placed on the house at the date of death in writing.
• Decide whether you intend to live in it, rent it or sell it, since each path is taxed differently.
• Keep every cost record from the day the house comes to you.
• Speak to an accountant or lawyer before you sell, rent or move in.

Frequently asked questions