Estate Sale of Real Property
Disclaimer: The following information is intended as general information and not to be read as legal advice. Please seek legal advice from qualified legal professionals.
Real property may be one of the most complicated transactions during estate administration. Hence, retaining a lawyer with expertise in this area is important, but not all lawyers carry the necessary insurance to practice real estate law. Landmark Law satisfies compliance requirements, but we also have the know-how with more than 10 years of experience in this area of law.
Before exploring how real property is dealt with during probate and its resulting estate sale, let us first examine some general concepts.
Form of Ownership
How real property is dealt with in the context of probate depends on how the ownership of the title is structured. There are three basic forms of ownership:
a) Sole Ownership
b) Joint Tenants
c) Tenants in Common
Sole Ownership
Sole Ownership means one person holds title to the real property.
Joint Tenancy
Joint Tenancy involves an arrangement where two or more persons hold title to the real property. Should one person die, the remaining alive person(s) on title shall absorb the deceased’s share of the real property by right of survivorship. This means that the deceased’s share shall pass outside of probate to the remaining registered owners of the property.
For example, if A and B bought a detached residential home as joint tenants. When A dies, B will absorb A’s share in the real property, and A’s share will not be probated. Consequently, not subject to the computation of estate administration tax.
Tenancy in Common
Tenancy in Common is similar to Joint Tenancy ownership, where two or more persons share ownership rights in the real property. However, the right of survivorship does not apply. Rather, the deceased’s share of the real property passes to their estate and be distributed according to estate rules if the person died intestate (died without a Will) or according to the person’s Will if the person died testate (died with a Will). This means that the deceased’s share of the real property must go through probate.
For example, if A and B bought a residential home as tenants in common. When A dies, A’s share in the real property will pass to A’s estate to be probated before it is distributed to the resulting beneficiaries either determined by right through statute (if A dies intestate) or through A’s Will (if A dies testate). Consequently, the real property is subject to the computation of estate administration tax.
Estate Trustee
For an estate sale to be commenced, the person attempting to administer the estate must be appointed as an Estate Trustee of the estate. This means that the person is appointed either by the Court (if intestate) or by the Will (if testate) as the personal representative that is conferred the authority to administer the estate. The Land Titles System requires either a certificate of appointment of estate with or without a will to convey title.
Exceptions include:
i. the real property passes by right of survivorship;
ii. estate value is less than $50,000; or
iii. when the real property was converted from the Registry System and has not been processed under the Land Titles System [Land Titles Act].
For iii, instead of a certificate of appointment of Estate Trustee with a Will, the Will or a notarial copy including proof of death and the affidavit of execution of the Will is required to convey the real property.
However, intestacies always require a certificate of appointment of Estate Trustee without a Will. Hence, an Estate Trustee must be appointed before the real property may be conveyed.
If the real property was held in joint tenancy, it passes outside probate and shall be conveyed (transferred) through a survivorship application with the appropriate Land Registry Office. The survivorship application will remove the deceased’s name from the title.
If the real property was not held in joint tenancy (either sole ownership or tenants in common), then it is subject to probate and shall be conveyed (transferred) with the assistance of the Estate Trustee. An exception where the Estate Trustee’s involvement is unnecessary is when the real property vests in the beneficiary under a Will, the beneficiary may apply directly to be registered as an owner.
The Estate Sale
With that background, let us consider the process involved in an estate sale. First, we need to determine the scope of authority of the Estate Trustee consider required consents and family law implications. Then we need to prepare the required appraisal and take into account the applicable taxes.
A. Consents and Occupants
Consent of Beneficiaries
If there is a Will (the person died testate), it is important to determine the scope of the Estate Trustee’s authority and whether it allows for the sale of the property. If no authority is granted to the Estate Trustee in the Will, then the consent of a majority of the beneficiaries is required. Similarly, if there is no Will (the person died intestate), the consent of a majority of the beneficiaries (in both number and interest) is required. If the beneficiary is a minor or incompetent, the Children’s Lawyer or Official Guardian’s consent is required.
Matrimonial Home and Consent of Spouse
If the real property is considered a matrimonial home, a home where the couple resided together after marriage, then there are special rules surrounding its conveyance. For instance, transfers involving matrimonial homes require the consent of both spouses. Additionally, if the deceased owned interest as joint tenants in the matrimonial home with a third party rather than the deceased’s spouse, the joint tenancy is deemed severed immediately before the deceased’s death. Hence, title does not pass by way of survivorship. Rather, ownership interest is consequently deemed as a tenancy in common [Family Law Act].
For example, A and B are brothers, and A and C are spouses. If A and B bought a residential home as joint tenants where A and C have resided ever since their marriage. Then when A dies, A’s ownership interest in the real property shall no longer be a joint tenancy. Instead, A’s ownership interest shall become tenancy in common and be subject to probate. Consequently, the value of the real property is included in the computation of the estate administration tax.
Occupation
If there are occupants in the real property, the Estate Trustee should determine who they are and the terms and length of their occupancy. Special attention is also required if the occupant is a spouse as they may have rights of possession for a period under family law.
Additionally, there may also be situations where the estate is entitled to occupational rent. Occupation Rent implies a landlord and tenant relationship between the estate and the occupant even if one does not exist where reasonable rents are payable for the occupant’s possession of the real property.
B. Appraisal
Appraisal of the real property is often required, and it is good practice to obtain as soon as possible. The appraisal is necessary for:
1. obtaining the certificate of appointment as an Estate Trustee;
2. establishing the estate administration tax;
3. preparing the Estate Information Return;
4. distributions to the beneficiary, heir-at-law, spouse, or dependents;
5. spousal elections under the Family Law Act;
6. tax purposes; or
7. court purposes.
C. Taxes
Some of the tax implications were lightly discussed above. It is important to note the following tax considerations:
Estate Administration Tax
Estate Administration Tax [“EAT”] are taxes derived from the value of the deceased’s estate. Generally, EAT are deposited with the Minister of Finance when the personal representative applies for the certificate of Estate Trustee. However, a deferral may be requested with the Court for an exception in special circumstances. Once the estate certificate is issued, the tax is due.
Capital Gains Tax
Capital Gains Tax are payable taxes when a capital asset is sold for a gain. This capital gain is realized when the capital asset is sold, and its value has increased compared to its adjusted cost base [ACB]. The current going tax rate for capital gains is 50%, which means that half of the capital gains are taxable and included in the calculation for income tax payable [Income Tax Act].
On death, the person is deemed to dispose of all their capital property immediately before death at FMV under s. 70(5)(a) ITA. The executor will determine the PRE [Principal Residence Exemption, the capital gains tax exemption on your principal residence; there is a whole other test on whether a property is a principal residence or not] concerning the capital gains (if any) on the deemed disposition and report on the deceased’s terminal return. The estate, in turn, acquires the house at ACB [adjusted cost base] equal to the FMV [fair market value] determined immediately before death [s. 70(5)(b)] and that ACB will be the ACB for the receiving beneficiary under the Will or according to the laws of intestacy.
Please note this is just oversimplified information on tax consequences. It is always recommended to consult accounting professionals or tax lawyers for detailed explanations and the full mechanics of the tax consequences involving the conveyance of real property. Any tax consequences will largely depend on the material/relevant facts, Income Tax Act, CRA interpretations, Case law precedents and applicable statutes, etc. Hence, any questions involving tax or accounting calculations should be directed at tax professionals for further guidance. The above example is overly simplified to provide you with an initial understanding.
Please also refer to our other article "Taxes and Your Principal Residence [Click Here]" for more details. Or view the embedded article immediately below:
Land Transfer Tax
Land Transfer Tax is tax that a person must pay when that person acquires land or a beneficial interest in land and is payable to the provincial government. No tax is payable if the beneficiary inherits it under the Will or as heir-at-law by virtue of the law of intestacy [Land Transfer Tax Act]. However, Land Transfer Tax is payable for any sale to a third party. Whether the real property is conveyed by inheritance or sale, a Land Transfer Tax Affidavit must be filed. If the real property is located in Toronto, a municipal land transfer tax is additionally imposed on top of the provincial Land Transfer Tax.
There is a rebate if you are a first-time home buyer. Certain criteria must be met to be qualified as a first-time home buyer.
Property Taxes
Usually, property taxes are settled and accounted for between law firms when transacting on a conveyance. The property tax set-off is often outlined in the statement of adjustments. However, the Estate Trustee needs to ensure that property tax payments are up to date should a need for mortgage renewal arise in the interim. A request for mortgage renewal may be a necessary pleading to a lender when a certificate of appointment as an Estate Trustee is still pending (which takes time, and wait times may vary depending on the Court in which probate is sought).
D. Insurance
Similar to property taxes, proof of property or fire insurance policies are often required by the mortgage lender to instill confidence in their decision to grant mortgage renewal in the interim.
E. Listing
Once all of the above are considered and necessary steps fulfilled, the Estate Trustee may list the real property for sale. Listing is usually registered through a brokerage with the assistance of a real estate agent or realtor. However, with the ever-changing landscape of the real estate industry, listings may be registered without the assistance of a brokerage or agents. Nevertheless, professional help is always recommended.
F. Important Considerations
It is important to note that a large portion of the estate value is typically derived from the estate’s real property. And because real properties are illiquid, sometimes the estate may not have enough liquid assets to service recurring estate liabilities continually.
In those situations, the urgency to obtain probate is elevated and of high priority. This is because probate is required to bestow authority on the proposed personal representative and enable them to enter into a purchase and sale agreement with a buyer to finalize the sale of the real property. Once the estate property has been sold, one of the largest liabilities, such as a mortgage, would be paid off, consequently removing a large portion of the recurring liabilities and preventing foreclosure proceedings.
However, when parties intend to claim against the estate for reasons such as dependency or appointment as Estate Trustee, the probate application process is halted.
Summary of Scenarios
For a better understanding of how the above information may work together, let us look at some high-level sample scenarios and some resulting legal implications:
A. Sole Ownership
If A with no spouse bought the real property as a sole owner, some of the legal consequences are:
OR
If A with spouse bought the real property as a sole owner, some of the legal consequences are:
i. There is no right of survivorship, and the real property shall go through probate.
ii. The real property passes through the estate and is considered for estate administration tax.
iii. If there is a mortgage, the lender must be notified. Likely require proof that property tax and insurance are kept current.
iv. The title to the real property should be updated with Land Registry Office and provided to the mortgage lender, property tax department and the insurer.
v. There may be capital gains tax payable by the estate. Consult a tax professional.
vi. A’s beneficiaries (testate or intestate) do not need to pay the land transfer tax.
B. Joint Tenants [Right of Survivorship]
A and B are spouses and bought the real property as joint tenants. When A dies, some of the legal consequences are:
OR
A and B are friends, both with no spouses, and they bought the real property as joint tenants. When A dies, some of the legal consequences are:
i. B absorbs A’s share in the real property.
ii. If there is a mortgage, the lender must be notified. Likely require proof that property tax and insurance are kept current.
iii. Survivorship application should be registered with Land Registry Office. Once registered, the property tax department should be notified of the change.
iv. The real property passes outside of probate and is not considered for estate administration tax.
v. There may be capital gains tax payable by the estate. Consult a tax professional.
vi. B does not need to pay the land transfer tax.
A and B are friends, both with spouses, and they bought the real property as joint tenants. When A dies, some of the legal consequences are:
i. A and B’s joint tenancy gets severed and is deemed as tenants in common.
ii. There is no right of survivorship, and A’s share in the real property shall go through probate.
iii. The real property passes through the estate and is considered for estate administration tax.
iv. If there is a mortgage, the lender must be notified. Likely require proof that property tax and insurance are kept current.
v. The title to the real property should be updated with Land Registry Office and provided to the mortgage lender, property tax department and the insurer.
vi. There may be capital gains tax payable by the estate. Consult a tax professional.
vii. A’s beneficiaries (testate or intestate) do not need to pay the land transfer tax.
C. Tenants in Common
A and B are friends, both with no spouses, and they bought the real property as tenants in common. When A dies, some of the legal consequences are:
OR
A and B are friends, both with spouses, and they bought the real property as tenants in common. When A dies, some of the legal consequences are:
i. There is no right of survivorship, and A’s share in the real property shall go through probate.
ii. The real property passes through the estate and is considered for estate administration tax.
iii. If there is a mortgage, the lender must be notified. Likely require proof that property tax and insurance are kept current.
iv. The title to the real property should be updated with Land Registry Office and provided to the mortgage lender, property tax department and the insurer.
v. There may be capital gains tax payable by the estate. Consult a tax professional.
vi. A’s beneficiaries (testate or intestate) do not need to pay the land transfer tax.
Matrimonial Home
In all the scenarios above, it is important to be mindful that if the real property is considered as the matrimonial home to either A or B, then the consent of either A or B’s surviving spouse is required or by Court order. Whether the real property is considered a matrimonial home depends on the situation.
Estate Trustee
Once the legal consequences are considered and have been adequately dealt with, and after the Court has appointed an Estate Trustee, the real property may be listed with a realtor for an Estate sale of the real property. Please note that consent is required from any other owner(s) on the title.
However, the listing may be possible when an Estate Trustee is pending an appointment. This is possible when there is no contest with the Estate Trustee application. And when the real estate agent and the brokerage agree that the deceased’s real property may be listed on condition.
Landmark Law
There are various hiccups and complications throughout the estate process, which may seem onerous and complex. Nevertheless, with the assistance of Landmark Law, we will work with you and take you step-by-step through the probate or litigation process. Be rest assured that a dedicated and caring team will be standing with you throughout one of life’s most challenging times.
Disclaimer: This article does not contain legal advice and only provides general information. This article is also not updated periodically and may not reflect or be applicable to the current state of the law or any changes in the law from time to time. It is not intended to replace advice from a qualified legal professional and should not be relied upon to make decisions. In all cases, contact your legal professional for advice on any matter referenced in this article before making decisions. The use of this article does not establish a lawyer-client relationship.