The Tax Issue
I am in the midst of settling my mother’s estate and my accountant has told me I have to sell her house within one year or else I’ll have to pay capital gains tax. He is also telling me that all my mother’s possessions such as jewellery, furniture and and artwork may be subject to tax. I’ve never heard of this. Can you tell me if he is right?
OK, the first thing you must know is that generally, upon the death of an individual, she is deemed to have disposed of all her capital property immediately before her death for proceeds equal to fair market value at that time.
First, let’s deal with the house. I’m assuming your mother lived in the house for the full time she owned it and it is eligible for the principal residence exemption. That means there will be no tax on the gain at death, but you will still inherit the place at a tax cost to you equal to the fair market value of the house at the time of her death.
Now the question is, how do you determine what the fair market value was at the time of death? Well the best way is to actually sell the house immediately. The closer the date of the sale to the date of death, the better estimate you have of the value at death. The longer you wait to sell, the more you will have to rely on an estimate of the value at the time of death based on valuation methods. Whatever the difference is between the value at the time of death (i.e., your tax cost) and the actual sale proceeds when you sell will become a capital gain or loss in your hands.
If you feel the value will be going up in the future, then if you plan to sell, do it sooner rather than later if you want to avoid having to report a capital gain on the increase in value from the time of death.
If the value goes down, then selling within the first year of death allows you to make a special election to use the capital loss against any gains reported on your mother’s final tax return.
Now to the other stuff. Technically speaking, all personal belongings are referred to in the law as “personal use property”, and they are subject to special rules. They are also deemed disposed of at the time of death at fair market value. The only difference is that each item has a deemed minimum cost base and minimum value for tax purposes of $1,000. So, any item that is worth less than $1,000 will not be taxed. Gains will be taxed, and losses, if any, may be applied only against gains from other personal use property.
Items such as jewellery and artwork are another subset of personal use property called “listed personal property”, and are also subject to the above rules. Losses on this type of property, however, can only be applied against gains from other listed personal property.