Which Property Is My Main Home
If you use more than one home, you can nominate which will be tax-free for CGT purposes. It doesnt have to be the one where you live most of the time.
Generally, it makes sense to nominate the property that’s you expect to make the largest gain when you come to sell it. You have two years from when you get a new home to make the nomination.
Calculate Your Cost Basis
To determine capital gains on the sale of your home, you simply subtract your cost basis from the selling price. But what exactly is your cost basis? It’s not just the purchase price. It also includes certain settlement fees, closing costs and commissions associated with both the purchase and the sale . Add to this the cost of significant capital improvements you made over time for renovations, additions, roofing, landscaping, and other upgrades. All of these improvements will increase your cost basis, and therefore lower your potential tax liability. Hopefully, youve kept good records because this can add up!
On the other side of the equation, there are a few things that can reduce your cost basis. A lower basis will increase your profit, and potentially your tax. For example, if you have a home office and have claimed depreciation over time, you now have to subtract those deductions from your cost basis. Or if you received tax credits for energy-related improvements, you have to subtract that amount as well.
If You Convert Your Residence Into A Rental Property The Rules Change
If you convert your primary residence into a rental property, the tax basis at the time of the conversion will be the lower of either the adjusted base or the FMV . Typically speaking, if a primary residence was converted into a rental property just a few months before the sale took place, losses associated with making it a rental may or may not be deducted. It depends on whether or not profit was realized from your rental. Another consideration that will affect your profit and loss is whether or not there you were prevented by the lease from reoccupying the house for the duration of the lease.
If the house was purchased for resale rather than as a primary residence, then losses will be deductible even if you occupied the residence for a period of time before the sale. If you are only living in your house to prevent damage from vandalism or to keep the house in tip-top condition for the ultimate sale of the property, it is assumed that you have no intention of living permanently in the home. Losses may also be deducted if you received a piece of real estate from a donor or as a gift and you have no intention of living in the residence that you plan on selling or renting.
If your primary residence is owned by a partnership whose partners happen to be married, then the entire gain must be reported and is not eligible to exclude under §121.
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Expanded Reporting Requirements On Disposition Of Real Property
Under current rules, the CRA does not require that taxpayers report the disposition of property where the full principal residence exemption applies, ie. where no tax is payable. Under new rules, taxpayers will have to report the disposition of the residence, including the proceeds of disposition, the acquisition date, and a description of the property even if the principal residence exemption applied for all years the residence was owned. This change in reporting requirements will apply to all dispositions of real estate that occur on or after January 1, 2016. Talk to one of our experienced and professional Calgary Tax Lawyers and make sure you are reporting as required.
Cgt On Gifted And Inherited Homes
Your parents or relatives may want to leave you their home in their will. When they pass away, you’ll inherit the property at its market value at the time of death.
There is no CGT payable on death, but the value of the home will be included in the person’s estate. An estate is defined as being the total of someone’s assets and property, minus any debts and funeral expenses.
Depending on the value of the person’s estate, inheritance tax may be payable on the property.
If you then sell the property without having made it your own home, there could be CGT to pay.
The tax you pay will be based on the property’s value when you sell it, compared with its value on the date of death. If the value has increased, you’ll have made a taxable gain. As with any other property gains, you’re able to deduct any associated selling costs.
If youre given the home while the owner is still alive and living in it, this is called a ‘gift with reservation’.
Essentially, this means the value of the property will still be included in inheritance tax calculations when the gift giver passes away.
However, it may change things in terms of CGT. If you sell the property, the CGT you owe will be based on the increase in value between the date you were given the property not the date of their death and the date you sell it.
This is the case even though there may also be inheritance tax to pay on the home at the time of death.
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Do You Pay Capital Gains Taxes When You Sell A Second Home
Because the IRS allows exemptions from capital gains taxes only on a primary residence, its difficult to avoid capital gains taxes on the sale of a second home without converting that home to your primary residence by considering the two-in-five-year rule . Put simply, you determine that you spent enough time in one home that it is actually your primary residence.
If one of the homes was primarily an investment, its not set up to be the exemption-eligible home. The demarcation between investment property and vacation property goes like this: Its investment property if the taxpayer has owned the property for two full years, it has been rented to someone for a fair rental rate for at least 14 days in each of the previous two years, and it cannot have been used for personal use for 14 days or 10 percent of the time that it was otherwise rented, whichever is greater, for the previous 12 months.
If you or your family use it for more than two weeks a year, its likely to be considered personal property, not investment property, and thus subject to taxes on capital gains, as would any other asset other than your principal residence.
Exemptions On Capital Gains Tax For Donations
If you donate certain assets to a registered charity or other qualified donees, you may be exempt from paying capital gains tax on any capital gains realized from these gifts. The types of assets that are eligible for the exemption when donated are:
- A share of a stock of a mutual fund corporation or a unit of mutual fund trust
- A share, debt obligation, or right listed on the stock exchange
- An interest in a segregated fund trust
- Ecologically sensitive land
Qualified donees in Canada include:
- Registered charities
- Registered municipalities
- Registered national arts service organizations
You will still have to report any capital gains and losses of these gifts on the capital gains tax form and will be required to fill out a separate form – T1170 Capital Gains on Gifts of Certain Capital Property to receive the exemption.
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Convert Your Second Home Into Your Primary Residence
Capital gains exclusions are attractive to many homeowners, so much so that they may try to maximize its use throughout their lifetime. Because gains on non-primary residences and rental properties do not have the same exclusions, more people have sought clever ways to reduce their capital gains tax on the sale of their properties. One way to accomplish this is to convert a second home or rental property to a primary residence.
A homeowner can make their second home as their primary residence for two years before selling and take advantage of the IRS capital gains tax exclusion. However, stipulations apply. Deductions for depreciation on gains earned prior to May 6, 1997, will not be considered in the exclusion.
According to the Housing Assistance Tax Act of 2008, a rental property converted to a primary residence can only have the capital gains exclusion during the term in which the property was used as a principal residence. The capital gains are allocated to the entire period of ownership. While serving as a rental property, the allocated portion falls under non-qualifying use and is not eligible for the exclusion.
To prevent someone from taking advantage of the 1031 exchange and capital gains exclusion, the American Jobs Creation Act of 2004 stipulates that the exclusion applies if the exchanged property had been held for at least five years after the exchange.
Topic No 701 Sale Of Your Home
If you have a capital gain from the sale of your main home, you may qualify to exclude up to $250,000 of that gain from your income, or up to $500,000 of that gain if you file a joint return with your spouse. Publication 523, Selling Your Home provides rules and worksheets. Topic No. 409 covers general capital gain and loss information.
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How Does Letting Relief Work With Cgt
If you have let out either all or part of a property, a proportion of any gain when you sell it could be taxable. But if you used to live in the property , you might be able to claim letting relief, which will reduce your capital gains tax bill.
Letting relief doesn’t apply to buy-to-let investors who let out their properties and never live in them, and it’s now only available for people who have been in shared occupancy with their tenant/tenants. You can also only claim letting relief on the proportion of the property being let, for the period of time it was let out for.
The amount of letting relief you can claim will be the lowest of either:
- the gain you receive from the letting proportion of the home, or
- the amount of private residence relief you can claim, or
Note that you can’t claim private residence relief and letting relief for the same period. So, if you are letting the property out when you sell it, the past nine months of ownership will qualify for private residence relief rather than letting relief.
The exact amount of private residence relief and letting relief you can get depends on the amount you sell the home for.
What Is A Principal Residence
Your principal residence is where you and your family normally live in Canada during the year. You must own or jointly own the home. However, in some cases, a vacation property that you own and only you and close relatives use may be considered as your principal residence as long as you donât earn any rental income from it. You donât even have to live in the residence for the whole year. However, you can only claim one home as a principal residence in any calendar year for your family unit .
Your principal residence can be any number of different property types according to the Canada Revenue Agency. It can be a house, a duplex, a condo, a cottage, a cabin, a mobile home, a trailer or a houseboat. You can generally only have half a hectare of land on which your residence sits. However, there are exceptions to this. For instance, if the municipality you bought your property in has a minimum lot size that is already greater than half a hectare, then you may prove the increased lot size is solely for enjoyment purposes.
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How The Capital Gains Tax Works With Homes
Suppose you purchase a new condo for $300,000. You live in it for the first year, rent the home for the next three years, and when the tenants move out, you move in for another year. After five years, you sell the condo for $450,000. No capital gains tax is due because the profit does not exceed the exclusion amount. Consider an alternative ending in which home values in your area increased exponentially.
In this scenario, you sell the condo for $600,000. Capital gains tax is due on $50,000 . If your income falls in the $40,400$441,450 range, your capital gains tax rate as a single person is 15% in 2021. If you have capital losses elsewhere, you can offset the capital gains from the sale of the house by those losses, and up to $3,000 of those losses from other taxable income.
|2022 Long-term Capital Gains Rates
When Do I Pay The Capital Gains Tax On Real Estate
If you are required to pay capital gains tax, you pay the tax when you sell your property. However, the capital gains tax is dependent on several factors, including your current tax bracket, the length of time youve owned and occupied the property, and whether the house is your primary residence.
Be sure to check the IRS requirements for paying the capital gains tax to determine when you have to pay and if you are eligible for an exemption.
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Capital Gains On Sale Of Second Home
If you own multiple homes, it may not be as easy to shelter sale profits as it was in the past.
The Housing Assistance Act of 2008 was designed to provide relief for homeowners on the edge of foreclosure, yet it could cost the owners when they decide to sell.
You used to be able to move into the second property, make it your primary residence, live there for two years, and profit from the gains.
Even when your second piece of real estate is converted into your primary home, you will be taxed on part of the gains based on how long the home was used as a second home and not the primary residence.
Expenses That Can Be Added To The Cost Base
The expenses that investors can add to a cost base include, but are not limited to:
This could lead to a reduction in the amount of CGT required to pay on the sale of the investment property.
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Proposed Changes To The Principal Residence Exemption A Calgary Tax Lawyer Analysis
On Oct 3, 2016 the Department of Finance announced 4 proposed changes to the principal residence exemption affecting non-residents of Canada, certain trusts, reassessment periods, and reporting requirements for all dispositions. The principal residence exemption is a well known and well utilized income tax exemption that allows a Canadian taxpayer to be exempt from paying income tax on capital gains on the disposition of the taxpayers principal residence. However, rather than only applying to the taxpayers primary home, the exemption can be claimed for any property that the taxpayer or his spouse/children ordinarily inhabit. That means the principal residence exemption can also apply to any capital property that you own that you reside in periodically, meaning that cottages or vacation homes may also qualify for the exemption. If you have questions about the principal residence exemption, talk to one of our expert Calgary Tax Lawyers today.
What If You Don’t Qualify For The Residence Exclusion
If you’ve owned your home for less than a year, you aren’t eligible for the primary residence exclusion. In this case, your short-term capital gain would be $350,000, which is taxed as ordinary income. Added to your regular income of $70,000, your taxable income becomes $420,000.
Using the short-term capital gains tax rates shown above, the tax bill on your home sale would be $109,736. Holding on to your home for at least a year would convert this to a long-term capital gain and reduce your capital gains tax bill to $52,500, or 15% of your profit.
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Scotiabank Urges Against Broad Capital Gains Tax On Primary Residences
Scotiabank Economics is recommending against instituting a capital gains tax on principal residences as Canadian home prices continue to surge.
In a research note published Sunday, Scotiabank Chief Economist Jean-François Perrault said such a tax would only serve as a blunt instrument to take some of the heat out of the red-hot residential real estate sector and would not address deeper structural issues.
“A more significant revision to capital gains on principal residences should not be considered. The tax-sheltered gains from owning a home confer a significant advantage to homeowners versus renters,” he said.
“As tempting as it might be to reduce this advantage by taxing a portion of the capital gains on a principal residence, such a change in taxation would represent a significant financial blow to Canadians.”
The call comes in the wake of RBC Senior Economist Robert Hogues recent argument that policymakers should put everything on the table to tame runaway housing markets in Canada, including “sacred cows” like a capital gains tax on primary residences. Currently, gains on the price appreciation of a principal residence are not taxed in Canada, though any appreciation on secondary residences like a cottage are subject to a tax. A capital gains tax on principal residences could theoretically slow down home sale activity, and it would present a sea-change in Canadian housing policy that would catch many current homeowners flat-footed.