Date Of Ownership For Tax Purposes
The sale of real estate will be reportedon your tax return for the calendar year in which the legal title to theproperty is transferred to the buyer – this is the completion date. The possession date is the date on which the buyer is given the keys and canmove in, which is often 1 or 2 days after completion date, but could be on thesame date.
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.
Borrow Against Your Equity In The Cottage
The problem with borrowing is that you must pay it back with interest, and the interest paid is not deductible. While cottage values continue to rise there is no certainty as to what the market will be like when it comes time to sell. Other questions such as who will lend you the money? Will banks be tight with lending then? What will interest rates be like? These questions can only be answered with a crystal ball.
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How Long Have You Owned The Second Home
The IRS categorizes your ownership and capital gain as either short-term or long-term gain. If you have owned the home for a year or less, it is considered a short-term gain.
Normally though, the capital gain will be considered long-term since most second homes will have been owned for more than a year when sold.
Sometimes life gets in the way with unforeseen circumstances that causes the need to sell. A good example is job changes that make the sale of the home necessary.
If your situation falls into the short-term gains category, its going to be taxed as ordinary income in your tax bracket or using the marginal tax rate.
The tax you owe could potentially be as much as 37% of the profit you made from selling the home,e depending on your tax bracket.
For 2020 the income tax brackets are as follows:
An excellent resource from Nerd Wallett provides a breakdown of the tax bracket based on your income. You can use this to determine the amount of capital gains you would be taxed on when selling a second home.
The capital gains tax rate for short-term ownership will be determined based on your income. As you can see, the short-term capital gains tax can be costly.
What Is The Capital Gains Tax Rate
Your capital gains tax rate will depend on your current tax bracket, the length of time youve held the asset and whether the property was your primary residence. Well look at that below.
Its also important to know the type of asset youre dealing with, because while most long-term capital gains are taxed at rates of up to 20% based on income, there are situations in which higher rates apply.
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How Much Are Property Taxes In Toronto
Property tax rates in Toronto vary depending on the type of property you own and are set every year . Toronto property tax rates include an education tax and a city building fund tax.
The amount of your property tax is calculated on the phased-in property assessment value of your property, determined by MPAC .
MPAC has assessed your home at $800,000 for 2018. Based on 2018 Toronto property tax rates, you would owe:
Property tax: $800,000.00 * 0.004632369 = $3,705.90
Education tax: $800,000.00 * 0.0017 = $1,360.00
City Building Fund: $800,000.00 * 0.000022685 = $18.15
Total Taxes*= $5,084.05
Good news: MPAC property assessments dont really reflect current market value, so while you may have paid $1,500,000 for your house, MPAC probably has you paying taxes on a much lower assessed value.
You can check how much property taxes are by using the City of Toronto property tax calculator
What Is Real Estate Transfer Tax
Among other selling-related costs and fees, sellers are responsible for paying real estate transfer taxes, which are also called a government transfer tax or title fee. The transfer tax on selling a house is calculated as a percentage of the sale price. The rate varies widely by state, and even from one city to the next. And some places have no transfer taxes at all.
- The median transfer tax in the U.S. is $745.
- In Seattle, the real estate transfer tax on a median-valued home is $8,749.
- In Washington, D.C., the real estate transfer tax on a median-valued home is $5,886.
- St. Louis and Portland, among other cities, have no transfer taxes.
Here are the median transfer taxes for the largest 35 metro areas:
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Betting On The House: Rules For Property Sales
Real estate agent Shelley Bridge vividly recalls how a love affair once cost a young man more than $20,000 in federal taxes.
The man, with Bridges help, had previously bought a house for around $200,000. Having fallen in love several years later, he moved in with his girlfriend and put his house up for rent.
Three years passed. He decided it was time to sell his housenow worth roughly $350,000and contacted Bridge, owner of a Re/Max office in Denver. Knowing about his living arrangement, Bridge asked how long it had been since the house had been his primary residence. “Three years last month,” came the answer. Oh, you just missed the window, Bridge informed him.
Because of his three-year absence, he would have to pay tax of more than $20,000 on the sale, because of the appreciated value of his home. Had he sold the house a month earlier, he would have only owed tax on the profit equal to the depreciation he deducted in the years in which he rented out the house.
Knowing the tax lawsin this case, that if you live in a house for two of the previous five years, you owe little or no taxes on its salecan make a considerable difference in the tax picture when you sell a building, whether its your residence or property that was previously your residence.
The man in this example could have moved back into the house until he met the requirement and then sold it with a much smaller tax burden, but his girlfriend, now his wife, wasnt up for it.
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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Capital Gains Tax On Sale Of Property
Real estate property includes residential properties, vacant land, rental property, farm property, and commercial land and buildings. If you have sold real estate property, you will have to report any capital gains or losses on Schedule 3, the capital gains and losses form. If you sold both the property along with the land it sits on, you must determine how the sale price is distributed between the land and the building and report them separately on theTax Form Schedule 3.
For example, you just sold a property for proceeds of disposition less outlays and expenses of $500,000. The Municipal Property Assessment Corporation appraised the land at $125,000, meaning that the land is worth 25% of the property value. Your adjusted cost base was $400,000, so your total capital gains is $100,000, and your taxable capital gains is 50% of that, or $50,000. The taxable capital gain for the land would be $12,500 and the taxable capital gain for the building would be $37,500. However, if the government suspects the property is used for business purposes, the tax will be paid on business income rather than capital gain. This increases the inclusion rate to 100%.
Capital Gains Inclusion Rate
Thecapital gains inclusion rateof 50% determines how much of your capital gains are subject to tax. Investments in registered plans such as aRegistered Retirement Savings Plan , Registered Pension Plan , orTax-Free Savings Account are considered tax-sheltered and capital gains tax will not be charged on investments while they are held in these accounts. The disadvantage with a registered investment account is that you cannot carry forward any capital losses. For more information on registered and non registered investment accounts, seeCapital Gains on Investment Accounts.
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When Do You Pay Capital Gains Tax On A House Sale
If you sell a property that is not designated as your principal residence, you need to pay tax on half of any capital gains from the sale. You don’t have to pay capital gains tax if you sell your principal residence. This isnt new. What’s changed is that you now have to report the sale of your property even if it’s your principal residence on your income tax return.
As long as you are a Canadian resident , you still dont have to pay capital gains taxes, but youll need to include some information about the sale of your home on your tax return.
How To Avoid Paying Capital Gains Tax When Buying Another Rental Property
If you use the proceeds from the sale of the second home to buy another home to rent out, you can avoid paying tax on the sale of the second home. This is known as a 1031 exchange and lets you avoid paying the tax for the time being, at least.
However, there are some strict rules you have to follow, and if you fail to stick to them, you will need to pay the capital gains. These rules are:
- Money from the second home sale has to go into an escrow account, and it cant be used for anything else.
- You only have 45 days to find another property to buy.
- You also have to close on the new property within 180 days.
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How To Avoid Taxes On Your Investment Property
Investors who cannot qualify for the capital gains tax exemption still have options to save on taxes when selling an investment property.
As these tax-avoiding arrangements are quite complex, you should enlist the help of a real estate attorney, or real estate savvy tax professional so that you dont fall victim to all of the red tape.
Put Your Earnings In A Tax Shelter
Tax shelters act like umbrellas that shield your investments. As long as your investments remain inside a tax shelter, they are left to flourish duty-free. You can buy and sell stocks at your leisure with no tax consequences.
An RRSP is one of the most popular tax shelters in Canada. Any profit you make inside an RRSP-registered account isnt taxed as the profit is earned. When you withdraw money, you will be taxed at your full marginal rate because you did not pay tax on your income when you contributed.
A TFSA functions similarly to an RRSP in protecting against capital gains. The biggest difference is that you the money you put in an RRSP has already been taxed, so when you withdraw it , you can do so tax-free. If you contribute about $6,000 annually with after-tax dollars, and invest that money over 30-50 years until it grows to $1 million , you can withdraw that $1 million completely tax-free.
An RESP is another tax-shelter in which you can avoid capital gains tax. Since you plan to use that money in a short-to-medium term horizon for your childs education, youll likely want to invest in low- to medium-risk securities. Your child will pay tax on the withdrawals, but since their income is likely going to be very low while theyre students, the rate will be minimal. Just note that youll have to close down the account in the 35th year after you opened it.
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Paying Capital Gains Taxes When You File Your Tax Return
When you sell your home for a taxable gain, you must include two forms with your tax return for the year to report the sale: Form 8949, Sales and Other Dispositions of Capital Assets and Schedule D , Capital Gains and Losses. You list on Form 8949 the sales of all your capital assets during the year. In addition to your home, these could include other capital assets such as stocks, rental property, or cryptocurrency. Short-term and long-term capital gains are listed separately. You must provide the following information:
- property address
- dates you purchased and sold your home
- tax basis of your home
- amount of home sale exclusion , and
- total gain on the sale.
You may deduct capital losses from capital gains, subject to complex rules. You then report your total short-term and long-term capital gains on IRS Schedule D. Your total capital gain or loss is then listed on the first page of your IRS Form 1040 .
If you owe the Net Investment Income tax, you will need to report it on IRS Form 8960, Net Investment Income Tax Individuals, Estates, and Trusts.
You should have a tax professional complete these forms for you or at least use tax preparation software. Refer to IRS Publication 523, Selling Your Home, for the details on reporting your sale on your income tax return.
Making Sure The Home Is Classified As A Rental Property
Along with these rules, some other rules need to be met to classify the home as a rental property.
- You are required to have owned the home for at least two years.
- It needs to have been rented for at least 14 days in each of the last 2 years.
- The home cant have been used as a vacation property for more than 14 days, or 10% of the time it was rented for, during the last 2 years.
In addition to these rules for the home you are selling, they also apply to the new home. If you are going to attempt a 1031 exchange, the difference between a second home and a rental property is quite specific.
You have to be careful to follow the rules. Otherwise, you could run into problems with the IRS. For this reason, its often better to get professional advice to avoid a sale of second home tax.
Buying a second property to use for vacations, or to rent to tenants, can be incredibly profitable. But when you decide you need to sell, you have to be ready to deal with the capital gains tax that you could owe to the IRS.
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Adjusted Cost Base For Financial Instruments
For financial instruments such as stocks, the adjusted cost base is calculated as the number of shares multiplied by the share price at the time the shares were bought. For instance, if 100 shares of XYZ Company were purchased at a price of $30 each, then the ACB would be $3,000. If more shares of the same corporation are purchased in the future, the adjusted cost base would be the total cost of all the shares purchased at their respective prices. The adjusted cost base per share would be the average purchase price for all the shares. For instance, if you purchased 50 more shares of XYZ Company at a price of $35, the ACB per share would be $31.67. The adjusted cost base also includes any costs incurred to acquire the stock, such as trading commissions. Since commissions increase your cost, investors and active traders may benefit from low-commission andfree trading platforms.
What Are Capital Gains Taxes
From personal items to investment products, almost all of your possessions are capital assets. That includes property like cars or real estate and investments like stocks or bonds. Lets say you decide to sell one of these assets, such as your home. The profit you make from the sale can potentially incur a tax called a capital gains tax.
Long-term capital gains occur when you sell an asset that youve held for more than one calendar year. Short-term capital gains occur upon the sale of an asset thats been held for less than a year. While tax rates vary, long-term capital gains are typically taxed less than short-term capital gains.
Its important to note that capital gains taxes only kick in for realized gains. That means it applies once you sell the asset for more than its basis. If a gain is unrealized, meaning you still own the item, then this specific tax does not come into play.
The long-term capital gains tax rate varies between 0%, 15% and 20%. There are a few higher rates for particular items, but they dont apply to a home sale. In contrast, short-term capital gains are taxed as normal income, which can be a much higher rate. Income tax rates vary between 12% and 37%.
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