What comes to mind when you think of selling one or more of your properties or passing them down to your beneficiaries after your passing? If you are like most people, you are counting the zeros in your profit margin. The reality is property owners of multiple properties do not always end up with as much profit as they planned because of capital gains taxes, and life insurance is an excellent tool for covering these costs.
Whether you have multiple residences, vacation homes, or rental properties, we are outlining what you need to know about the best way to cover the impact of capital gains taxes before you die.
What To Know About Property Taxes and Transferring Ownership of Multiple Properties
In your financial planning, the decisions you make can positively or negatively impact how much money is left for your loved ones after you are gone. Under certain circumstances, capital gains taxes can put a deep cut into profits for multiple property owners.
How do capital gains taxes come into play? If you make a profit on a property that is not your primary residence, there is a possibility that you or your estate will have to pay capital gains taxes to the government.
To get a better understanding of capital gains taxes, you need to calculate the adjusted cost base (ACB), which is the cost you paid for a property plus whatever you paid to acquire it. ACB includes costs such as legal fees and commissions. It also accounts for capital expenditures such as the cost of additions and betterments to the property. Once you have calculated the ACB, you subtract it from the selling price, which gives the government a basis for capital gains taxes.
Special rules also apply to property that you pass down to your heirs as a gift. According to these rules, the value of your property is calculated by assessing the fair market value on the day someone receives it. Normal maintenance and repair costs are not included with ACB.
Will Your Beneficiaries Be at Risk of Capital Gains Taxes?
Capital gains taxes are not levied on a surviving spouse because the law allows for one spouse to transfer properties to the remaining spouse without tax implications.
The picture looks differently once both spouses pass away, as the properties get passed down to their children or others.
Capital gains are taxed at 50%. Once secondary properties are sold, whoever owns the property (even if it was passed down through an inheritance) must add 50% of the amount of the property sales to their income. This amount determines the new tax bracket, and it becomes the basis for the personal tax rate.
Depending on the amount of the capital gain, it could bump property owners into a higher tax bracket, therefore causing them to pay more on capital gains than they would if they did not own secondary properties.
While you may be aware of the implications of capital gains taxes, the impact could catch your beneficiaries totally by surprise. They may not be prepared to pay what they owe in capital gains taxes if ownership of your properties transfers to them upon your passing.
Unless you have prepared them for it, 50% is probably a much larger percentage than your beneficiaries were planning for as they attempt to finalize your estate. With a little forethought in your financial planning, you will not have to worry about putting your loved ones in a financial position they are not prepared to handle. That brings us to the topic of life insurance.
How Life Insurance Can Solve the Problem of Capital Gains Taxes for Multiple Properties
Family members who receive one or more properties through an inheritance often do not have the funds to pay the capital gains taxes. This can produce an unfortunate situation where family members have to sell a beloved family home or cottage to satisfy the capital gains tax debts. That is probably not what either of you had hoped for.
However, it does not have to be this way. A life insurance policy can provide the funds that your family members need to pay the capital gains taxes, so they receive the full value of your property or properties. You have worked very hard all your life to create your wealth. Certainly, you will want to pass as much of your hard-earned assets down to your loved ones as possible.
Either a term life insurance policy or a permanent life insurance policy can provide more than enough funds to handle capital gains taxes, and it is the perfect solution to protect the assets you pass along to your loved ones.
A life insurance policy tells your loved ones that you love and care about them enough to plan ahead for their financial health and well-being.
Final Thoughts
It can be daunting for some to think about the types of scenarios that could play out after they die. Imagine how much more daunting it will be for your loved ones to deal with your estate while they are in the process of grieving. That is why it is so vital to consider all the costs, including capital gains taxes, that your loved ones could be facing upon your passing, and develop a plan for them.
Documentation is the key to preparing well for your final estate plan. Be sure to keep documents that pertain to the acquisition of your properties. Once the property is sold, the owners must also keep records of when the property was sold or transferred.
Here is a rundown of what you need to document:
- Date of the original purchase or acquisition
- Purchase price
- Commissions
- Legal fees
- Records of the number of shares that were sold, the class of the shares, and the names of the funds or corporations (for property owners who have stock)
It all sounds complicated, and to some degree, it is. Nonetheless, our experts at Hometown Life Insurance are happy to explain it in terms you can understand. More importantly, they are happy to explain all the available life insurance policies to help protect your estate if you have multiple properties. Call us today at 289-606-0103!
External Links
- https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/personal-income/line-12700-capital-gains/calculating-reporting-your-capital-gains-losses/adjusted-cost-base.html
- https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/personal-income/line-12700-capital-gains/shares-funds-other-units/identical-properties/property-you-inherit-receive-a-gift.html
- https://www.hrblock.ca/blog/6-things-to-know-about-capital-gains/
