A capital gain occurs when you dispose of property for more than its cost. The calculation of this gain is often very simple. If you purchase a stock today for $10 and sell it tomorrow for $11, you have a gain of $1. However, how do you calculate this gain for property that you inherited or received as a gift?
Generally, you are considered to have received inherited or gifted property at its fair market value. The fair market value on the date received becomes your cost base to calculate the capital gain or loss on a future disposition. You should obtain evidence to support the valuation to avoid any difficulties in the future. You can request a valuation from a qualified professional, such as a realtor for a home or cottage, or an appraiser for art or jewelry.
Inherited property is often received through the will of a loved one. Generally, the deceased would be required to report a deemed disposition of this property on their terminal tax return. The deemed disposition occurs at fair market value and the capital gain is taxable on the return. The fair market value reported by the deceased should typically be used as your cost base.
In certain situations, property is inherited from a deceased taxpayer at its original cost. This happens most frequently between spouses. Properties such as homes, cottages, or investment accounts often rollover to the surviving spouse at original cost unless certain elections are filed. It is important to understand how the property was reported on the deceased’s final tax return and obtain all necessary documentation to support your cost base in the property.
Keeping proper records to support the amounts reported on your tax return is one of the simplest suggestions an accountant can make. This is particularly true for inherited property as determining the cost base is more difficult than producing a purchase agreement, and it becomes increasingly difficult as time goes on.
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