Can an estate claim a loss for tax purposes if the estate sells the property for less than what it was valued for at time of death? Hard to imagine such circumstances in this current real estate environment but in the unlikely event it does occur, what are the rules?
The Income Tax Act (“ITA”) deems a person to have disposed of their principal residence for proceeds equal to its fair market value (“FMV”) at that time of death. Any resulting capital gain (i.e., value of the property at time of death in excess of cost to acquire the property) is exempt from tax by the application of the principal residence exemption. So, what happens in the unlikely event (perhaps due to circumstances beyond its control) the estate sells the property for net proceeds less than the deemed FMV at the time of death i.e., the estate incurs a capital loss. Can the estate claim that capital loss for tax purposes?
Under the ITA, a person cannot claim a capital loss from the disposition of their principal residence. The ITA deems a loss to be nil if it is from a disposition of personal- use property, generally defined being used primarily for the personal use or enjoyment of the taxpayer, or a person related to the taxpayer.
From what I understand personal use and enjoyment is subject to interpretation. Under certain circumstances it may be possible to claim a capital loss from the disposition of a personal residence by an estate but a case for change in use must be clearly made and supported. If the property is owned and used primarily for the personal use or enjoyment of the taxpayer or a related person, it is considered personal use property use under the ITA.
At a recent roundtable discussion, the Canada Revenue Agency (“CRA”) was asked what about a cottage property held by the taxpayer upon death, and held for personal use or enjoyment until time of death – could the estate claim a capital loss if one arose after death?
The CRA asserted that under the right fact circumstances, real property is deemed to be non-depreciable capital property to the estate, assuming that it was not rented or used to earn income. If the cottage held by the estate was not used by any of the beneficiaries or anyone related to them after the person dies, the CRA contended that the cottage would not be considered personal-use property to the estate. Any capital loss realized from the disposition of the cottage would therefore not be deemed to be nil by the ITA and accordingly would be available to offset capital gains of the estate.
So, depending on the circumstances, a capital gain arising from a deemed disposition of a personal use property at death could be exempt by applying the principal residence exemption and a capital loss arising from the actual disposition of the property after death could be tax-deductible.
It all depends on use!
Happy Reading and stay safe.