Quick answer: Heirs inherit a property at the date-of-death fair market value — that becomes the new adjusted cost base. A future sale by the heir is taxed only on the gain above that FMV, not on the appreciation during the deceased’s life.
What this means: If a parent bought a house for $200K and it was worth $700K at death, the heir’s ACB is $700K. Selling later at $750K means a $50K gain — not $550K. The $500K of pre-death appreciation was already taxed on the parent’s final return.
What to do next: Estimate the gain on the final T1 first. Run the capital gains calculator →
Part of the estate capital gains series. For the full executor walkthrough — deemed disposition, the 2026 inclusion rate, principal residence exemption, and final T1 vs estate T3 — start with Capital Gains When Someone Dies in Canada: 2026 Estate Tax Guide.
Inheriting a house in Canada does not by itself trigger capital gains tax for the beneficiary. The deceased’s estate is treated as having sold the property at fair market value on the date of death, and any capital gain is taxed on the final return of the deceased, not on the beneficiary. The beneficiary inherits the house with an adjusted cost base equal to that fair market value, so any capital gain when the beneficiary later sells is measured against that stepped-up cost.
Three scenarios
| Scenario | Tax on the deceased’s final return | Tax on the beneficiary |
|---|---|---|
| House was the deceased’s principal residence; left to a non-spouse beneficiary | Gain reported on Schedule 3 and designated on Form T1255; usually fully exempt | None at the time of inheritance. ACB equals FMV at date of death. |
| House was the deceased’s principal residence; left to surviving spouse or qualifying spousal trust | No capital gain on final return (automatic spousal rollover) | None at the time of inheritance. Spouse inherits the deceased’s ACB and continues the years of designation. |
| House was a cottage or rental property (not a principal residence); left to a non-spouse beneficiary | Capital gain on Schedule 3 measured as FMV at death minus ACB; one-half taxable | None at the time of inheritance. ACB equals FMV at date of death. |
What the beneficiary actually inherits
The beneficiary’s adjusted cost base in the inherited house is its fair market value on the date of death, supported by an appraisal or a comparable-sales valuation. From that point, any future sale by the beneficiary is taxable as a capital gain only on the appreciation that occurs after the date of death. Personal-use property loss rules still apply: if the beneficiary uses the house personally and later sells at a loss, the loss is denied.
Worked example: inherited cottage sold three years later
A taxpayer dies in March 2026 owning a cottage with an ACB of $200,000 and an FMV at death of $700,000. The cottage passes to two adult children equally.
- Final return of the deceased reports a $500,000 capital gain on Schedule 3. Taxable capital gain is $250,000 (one-half inclusion rate).
- Each child inherits a 50 percent interest with an ACB of $350,000.
- In 2029 the children sell the cottage for $820,000. Each child’s proceeds are $410,000. Each child’s capital gain is $410,000 minus $350,000, equal to $60,000. Taxable capital gain per child is $30,000.
The same property has been taxed twice on different gains: the deceased’s $500,000 gain to the date of death, and each child’s $60,000 gain after the date of death. There is no double tax on the same dollar of gain.
If the beneficiary moves into the house
A beneficiary who moves into the inherited house and uses it as their principal residence can begin designating it as their principal residence from the year they ordinarily inhabit it. Years before that during which they did not own the property are not part of their designation. The principal residence formula limits the exempt portion of any future gain to the ratio of designated years (plus one) over total years of ownership.
If the house is rented out before sale
Renting an inherited house is a change in use. The beneficiary must report a deemed disposition at fair market value at the start of the rental use, unless they file an election under subsection 45(2) to keep the property as a principal residence for up to four years while it is rented. The election cannot be used while another property is being designated.
Forms, lines, and schedules
| Document | Use |
|---|---|
| Schedule 3 (T1) | Reports the deemed disposition on the final return |
| Form T1255 | Designates the deceased’s home as a principal residence on the final return |
| Schedule 3 (T1) of the beneficiary | Reports the beneficiary’s later sale of the inherited property |
| Form T2091(IND) | Designates the beneficiary’s later property as their principal residence when they sell it |
| Form T1135 | Required if the inherited property is foreign and total cost exceeds $100,000 |
Probate fees are separate from capital gains tax
Provincial probate fees (or estate administration tax in Ontario) are charged on the value of the estate’s assets that pass through the will. Probate fees are not capital gains tax and are not affected by the inclusion rate. They apply on top of any income tax on the deceased’s final return.
Frequently asked questions
- Do you pay capital gains tax on an inherited house in Canada?
- Not at the time of inheritance. The deceased's estate is taxed on any gain up to the date of death. The beneficiary's adjusted cost base equals fair market value at the date of death.
- Is an inherited principal residence taxable?
- No, the gain to the date of death is usually fully exempt under the principal residence exemption, designated on Form T1255. The disposition still has to be reported on Schedule 3 of the final return.
- What is the cost base of an inherited house?
- Its fair market value on the date of death, typically supported by a date-of-death appraisal.
- Do you pay capital gains tax if you sell the inherited house later?
- Only on the gain that occurs after the date of death (sale price minus the date-of-death fair market value, plus selling costs).
- What if the inherited house is rented out?
- Renting changes the use and triggers a deemed disposition at fair market value, unless you file a subsection 45(2) election to keep it treated as your principal residence for up to four years.
- Are probate fees the same as capital gains tax?
- No. Probate fees (or Ontario's estate administration tax) are charged by the province on estate assets that pass through the will. They are separate from federal income tax on capital gains.
- Does a surviving spouse pay capital gains tax on an inherited house?
- No. Property transferred to a Canadian-resident spouse or common-law partner rolls over at the deceased's adjusted cost base, with no capital gain triggered on the final return.