The Valuation of a Life Interest in Real Property

April 17, 2019

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What is a Life Interest?

A Life Interest in a property provides a designated person (the life tenant) with the right to occupy the property, as well as the ability to rent or use the property for their benefit during their lifetime. 

Value of a Life Interest Property

When is a Life Interest Granted?

Historically, the children of a deceased parent become the beneficiaries of real property left in the estate. The beneficiaries may either have the property transferred into their names, or the property may be sold immediately with the sale proceeds distributed to them.

However, in today’s world, it is not uncommon for a parent to re-marry later in life – either after a divorce or the death of a spouse. In many situations, the remarrying parent may wish to grant a “Life Interest” in the property to his/her second spouse, thus allowing the new spouse to remain living in or otherwise utilizing the property until their death. The second spouse beneficiary becomes a life tenant in the property. Upon their death, the property will often revert to the deceased’s estate.

The estate beneficiaries who receive the property at the death of the life tenant are called the “remaindermen.” They are often the children from the first marriage and hold a “residual interest” in the property.

Both the life tenant and the remainderman have real interests in the property, but they do not hold ownership at the same time. The remainderman’s interest does not become activated until the death of the life tenant.

Rights of the Beneficiary

It is important to understand the precise nature of the rights and restrictions of a beneficiary, often specified in the Will of a deceased, or a trust.

For example, the beneficiary may only have the “right to occupy” a property in accordance with specified conditions (i.e. maintaining the property in good repair). This is known as a Right to Reside, and is much more restrictive than a Life Interest. For example, a Right to Reside does not allow the beneficiary to rent or otherwise utilize the property for any other gain. The Right to Reside will typically cease once the person granted that right no longer occupies the property or fails to meet other conditions, leading to a forfeiture.

A Life Interest may have other restrictions placed on it, pursuant to conditions of a deceased’s Will. For example, the Life Interest may be limited to a maximum term or may terminate if the beneficiary re-marries or becomes incapacitated.

When is a Life Interest Valued?

A Life Interest is generally terminated when the life tenant dies. However, there are some situations that may require the Life Interest to be valued while the life tenant is still alive:

  • When the remaindermen are considering a proposal to buyout the Life Interest in order to access their residual equity interest in the property; or
  • When the life tenant is considering selling their Life Interest for any number of reasons. For example, a person holding a Life Interest may wish to obtain funds to enter a senior’s care home. However, the market for a Life Interest is extremely limited (given that the property must return to the estate at some point in the future). A more feasible solution would be to sell it to the remaindermen at a fair value to be determined.

How is a Life Interest Valued?

The discounted cash flow method (under the Income Approach) is frequently used to estimate the fair value of a Life Interest in a property. This method involves estimating the future net cash flow that can be generated from renting the property[1]. This would consist of annual rental income, less property taxes, maintenance and repair costs, as well as reasonable management fees.

The number of years included in the projected cash flow would be based on the expected remaining life of the person holding the Life Interest[2].

The annual net cash flow would be discounted to present value using a discount rate that reflects:

  • A risk-free rate of return[3]; plus
  • A premium for the inherent risk of not achieving the projected yield.

Adjustments to the value of a Life Interest may also be applied to account for special situations, such as the health of the person holding the Life Interest.

The fair value of the Life Interest would be deducted from the current market value of the property in determining the value of the remaindermen’s interest.

If you have any questions about the valuation of a Life Interest in a property, please contact one of our trusted Valuation Experts.


[1] If the property consists of a condominium where there are rental restrictions, the relevant cash flows might instead reflect the rental cost avoided from not having to rent a comparable property.

[2] The expected remaining life of a person in Canada (based on their age and sex) can be obtained by consulting the Life Tables, Canada, Provinces and Territories (2016) published by Statistics Canada

[3] A risk-free rate of return represents the time value of money, and is usually based on the yield currently available on a long term Government of Canada Bond (approximately 2% as of April 15, 2019). Bond yields can be obtained from the Bank of Canada web site.






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