How to transfer real estate property during your lifetime?

12 July 2024 by National Bank
Mother and daughter hugging each other, looking out of the kitchen window

Are you looking to transfer real estate property during your lifetime to your children? Maybe your rental property or a cottage? First of all, yes, it’s possible but take the time to evaluate all the possible scenarios. There are many solutions available, and they all come with their share of pros, cons, and major tax implications. Here’s an overview of your options. 

In this article :

Should you transfer your property during your lifetime or after your death? 

There are some advantages to transferring your real estate property during your lifetime to your loved ones, like to your children, for example. By going this route, you can rest knowing that you’ve helped a family member during your lifetime and experience the wonderful feelings that come with doing that. 

But there are some drawbacks. For example, if the money you would have made from selling your real estate property was part of your retirement strategy, you’ll have to review your plan. That’s another reason why you should weigh the pros and cons to make sure you’re in a good position to transfer your real estate property. Here are a few different scenarios. 

How do you transfer real estate property during your lifetime? 

What happens if you gift a real estate property during your lifetime? 

Donating a property is the simplest way to transfer real estate during your lifetime. It’s free. As the donor, you agree to transfer the building to your child – the donee – in return for no financial compensation. As honourable as this is, it’s important to remember that from a tax perspective, the gift will be treated the same as any other transaction or transfer of ownership. 

​When you donate a piece of real estate to your children, tax authorities will treat it as having been sold at its fair market value (FMV), meaning the highest amount you could obtain for the property. Even if no money is exchanged and the gift is made during your lifetime, the transaction will have an immediate impact on your taxes (capital gains tax and depreciation recapture, if applicable).

Therefore, it’s important to do the math and talk to your children to make sure they’ll be able to afford the costs related to this kind of gift. Will they also be able to pay the legal fees and financial costs associated with the property, such as taxes? That’s why it’s important to talk about this with an expert as well as your loved ones. 

Beware of selling real estate property below market value

Let’s discuss the myth of selling real estate property to a loved one for far below its actual market value. Many incorrectly believe that this is a fiscally beneficial strategy for both parties. 

​However, if you sell a property to your children at a bargain price, this could result in double taxation. Again, tax authorities will treat the property as having been sold to them at its FMV, and you’ll have to pay tax on the capital gain. Your children will then have to report the actual price they paid for the property, and if they ever sell it, will need to pay tax on the difference between the initial FMV and the price they paid.

That being said, there are strategies available to help avoid this issue. Take the time to speak with a real estate expert and your accountant.

Picto of a house with a dollar sign in front

Here’s an example:  Let’s say you bought a house 40 years ago for $50,000, and it’s now worth $200,000. Even if you sell the property for $60,000, you’ll be taxed 50% of the capital gain, i.e. on $75,000 (50% of $150,000). It’s a considerable amount and you’ll have to pay a lot of tax.

Plus, your loved ones will face the issue of double taxation. Tax authorities will consider your loved ones to have actually purchased the property for $60,000, so whenever they resell the $200,000 property, your children will be taxed on a $140,000 capital gain ($200,000 minus $60,000).  

What happens if you sell the property at fair market value? 

Many experts believe that the best way to transfer a building during your lifetime is by selling it. Usually, the cost should be paid in full to the seller when it’s sold. 

But what do you do if your child can’t afford it? Don’t panic – this happens all the time. It means you’ll have to handle both the sale and a loan: you could give your children a loan so they can buy your real estate property and keep the balance of the sale even. 

In addition, you’ll be able to spread out your capital gain over up to five years. 

Simply put, these are the pros and cons of this strategy:

Pros:

  • You’ll have an immediate inflow of cash. However, if you’re giving the buyer a loan, your cash inflow will be progressive. 
  • It’s a simple and inexpensive type of transaction. 
  • If there’s a loan involved, you can use your capital gain reserve to defer your taxes for up to five years. 

Cons:

  • You will immediately be taxed on the sale. You’ll need to include 50% of the first $250,000 of annual capital gains, 66.67% of any capital gains exceeding $250,000, and 100% of recaptured depreciation in your taxable income.
  • If there’s a loan involved, your taxes will have to be paid using your other assets, as the sale price will not have been paid in full.  

There are also other options

An advisor can also make other suggestions depending on your situation.

For all provinces except Quebec, you can opt for joint property of the asset with the right of survivorship, which allows you to sell 50% of a real estate property to your child so they may co-own it with you until your passing. 

There’s also a tax strategy that you could utilize through a joint-stock company. This is ideal for rental property owners who are planning their estate. 

Although it requires more organization, using a partnership is another option. An expert can work with you to find the best strategy.

How do you set up a transfer of your real estate property? 

Beyond transferring your rental property or your cottage, you may also be wondering how to distribute your assets among your children, if you have more than one. 

How do you make sure everything is distributed equitably? First, keep in mind that “equal” and “equitable” are two different things. Sometimes, it’s better to be equitable rather than equal. For example, one of your children may not be interested in owning 50% of a rental property, while the other may be disappointed to have only inherited half.  

Gifting your building to one and your life insurance and investments to the other may make everyone happy, for example. 

The key to success for a transfer or in estate planning is discussing it beforehand with your loved ones. Get your family together, let your children know about your intentions, and start a conversation. A financial planner can also help you plan your estate. 

Finally, if you want to transfer a real estate property in your lifetime, the important thing to remember is that there’s no one-size-fits-all solution. There are many different strategies you should evaluate depending on your personal and financial situation, and those of your children.

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