Q: My parents own two homes within a couple of blocks of each other; they live in one home and my brother lives in the other (rent free). They have a home equity power line of credit owing on the second home. Both my parents have been diagnosed with terminal cancer. Their will is set up to be split five ways between my siblings and myself. What tax implications or other issues might there be with owning both homes when the estate needs to be settled?
Asked by Anonymous, Barrie, ON
I’m sorry to hear of your parents’ illness. I can imagine how hard that must be on your family.
With respect to the tax implications of owning two homes, your parents can designate one house as their principal residence which will have to be the house that they live in. On the death of the last to survive spouse, there will be a deemed disposition of both of the houses. The capital gain on the house that your brother lives in will be taxable on the last surviving spouse’s final tax return. This gain is 50% taxable and will be taxed at whatever effective tax rate applies. The gain on the house that your parents live in will not be taxable as long as they have designated this house as their principal residence for the entire time that they owned the house.
Unless there are significant other assets left to the estate, I would assume that both houses will need to be sold in order to fund payment of the taxes and the home equity power line of credit. Whatever assets are left can be distributed to the beneficiaries. If your brother owned the second house, he could designate it as his principal residence and eliminate the tax on the capital gain. It is too late to gift / sell it to him now as this will trigger the capital gain and the applicable taxes immediately.