Posted by: Daryl & Wendy Ashby | November 2, 2010

Inherited Properties

It is a great privilege to inherit a home from a loved one, but at a time of high emotion there are practical considerations that need to be weighed up.

“To sell or rent once you’ve inherited the property, that becomes more of a business decision than anything else,” says Dean Paley, senior financial planning specialist at Edward Jones in Mississauga. “The person will want to consider whether or not they want to be a landlord. There’s a lot of work involved … [you have] to find tenants, make sure the property is maintained and you run the risk of damage [to the property] from the tenants.”

However, Mr. Paley says, if you have this skill set then renting out a property can be lucrative.

“Compare the returns you are going to receive on an after tax basis from rental income to selling the property and then investing it in another vehicle such as the stock market or mutual funds,” Mr. Paley says.

Particularly if you already own property, Mr. Paley says that if your calculations suggest that the returns are going to be pretty similar, you may want to sell the house and invest the money in another type of asset. On the other hand, if the Stock Market has tanked, holding the property makes good sense.

If you do decide to sell the property, you will need to decide whether to sell it in its current condition or invest in repairs and renovation.

As far as upgrades and repairs go, painting and cleaning are always wise but the general theory is that most upgrades will usually not pay for themselves. Bathrooms and kitchens would be the best places to invest your money, but even they generally will not pay for themselves.

A lot of times, a buyer won’t have pocket-money after they buy a house to do the upgrades, so sometimes it may be best for you to fix the home up.

Investing in renovations will affect your taxes, though.

If the property is rented and you declare the income as all good little boys and girls should, the cost of the renovation could be a tax deduction; it could also be added to the cost of the property. In contrast, if the property was sold in the future, there may be less of a capital gain and therefore a taxable benefit.

There are a number of financing options for renovations.

“Once somebody passes away and you have title to the property, then you can put a mortgage on it or a line of credit,” says Heather Paterson, a mortgage broker with Invis in Toronto. “A line of credit would probably be safest. If you only need it for, say, three to six months during the renovation process, then, when you sell the property, you can pay that line of credit off in full without being subject to any interest penalty.”

Ms. Paterson says this option may work for people who do not have sufficient equity to borrow money for renovations against their principal residence.

“The only thing that might be an issue for borrowing against the inherited property would be the time it takes for the Title to be in the new person’s name,” Ms. Paterson says. She says it is crucial to consult a lawyer.

“Get an idea of the time-frame. How long does it take from the time somebody passes away to get on title,” says Ms. Paterson. “Then you’re looking at getting the renovations done as quickly as possible.”

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