Maria inherited a property from her grandmother in 2020 with a fair market value of $600,000. Her grandmother originally purchased it for $200,000 in 1995. Maria sells the property in 2024 for $750,000. For capital gains purposes, what is Maria's adjusted cost base?

Q: What is the correct answer to: Maria inherited a property from her grandmother in 2020 with a fair market value of $600,000. Her grandmother originally purchased it for $200,000 in 1995. Maria sells the property in 2024 for $750,000. For capital gains purposes, what is Maria's adjusted cost base?

The correct answer is $600,000 (fair market value at time of inheritance). Under Canadian tax law, when property is inherited, the beneficiary receives a 'stepped-up basis' equal to the fair market value at the time of inheritance. This is established under the Income Tax Act, which deems the transfer to occur at fair market value. Maria's adjusted cost base becomes $600,000 (the FMV when inherited), not her grandmother's original purchase price. This ensures only the appreciation during Maria's ownership period ($150,000) is subject to capital gains tax, preventing taxation on gains that occurred before she owned the property.

Q: What background knowledge is needed for this Real Estate Taxation question?

The stepped-up basis rule is established under the Income Tax Act and applies when property is inherited in Canada. Upon death, the deceased is deemed to have disposed of property at fair market value, and the beneficiary acquires it at the same value. This creates a new adjusted cost base equal to the fair market value at inheritance. The rule prevents double taxation by ensuring beneficiaries are only taxed on appreciation during their ownership. This differs from lifetime gifts, where the original cost base typically carries forward. Real estate professionals must understand this concept for estate planning discussions and advising clients on tax implications of inherited properties.

Q: What is a good way to remember the answer to this Real Estate Taxation question?

Picture inheritance as climbing a staircase where you 'step up' to a new floor. When you inherit property, you don't start from the ground floor (original price) - you step up to the current floor level (fair market value at inheritance). From there, you only count the steps you climb yourself (your ownership gains). When you see inheritance questions, visualize stepping up to the FMV floor. Ask yourself: 'What floor did I step onto when I inherited?' That's your new starting point for calculating gains, not where the previous owner started.

Q: What exam tip applies to this Real Estate Taxation question?

For inheritance questions, immediately identify the fair market value at time of inheritance - this becomes the new adjusted cost base. Ignore the deceased's original purchase price and focus only on appreciation during the beneficiary's ownership period.

Q: How does this Real Estate Taxation concept apply in real world practice?

A client inherited their parents' family home valued at $800,000 at time of death, though the parents paid $150,000 in 1980. The client now wants to sell for $900,000. As their agent, you'd explain they only owe capital gains tax on $100,000 (the appreciation since inheritance), not the full $750,000 appreciation since 1980. This knowledge helps you provide accurate tax guidance and realistic net proceeds estimates, building client trust and ensuring proper pricing strategies.

Question

Real Estate TaxationCapital GainsHARD

Maria inherited a property from her grandmother in 2020 with a fair market value of $600,000. Her grandmother originally purchased it for $200,000 in 1995. Maria sells the property in 2024 for $750,000. For capital gains purposes, what is Maria's adjusted cost base?

Answer Options

A

$200,000 (grandmother's original purchase price)

B

$600,000 (fair market value at time of inheritance)

C

$400,000 (average of original price and inherited value)

D

$750,000 (current sale price)