Capital Gains Tax - Selling a Home
Tax Laws are complicated. This page is intended to explain what Capital Gains are, not how you should deal with them or claim them. Your real estate lawyer will have much information about this when you sell your home, but it’s pretty simple for most people who declare their home as a Principal Residence… the gains you make are generally tax-free! It’s a good deal.
Real Estate is the most profitable investment that most of us will ever make, and the most tax-free profit we’ll ever take. If the government is licking its lips at the thought of all that tax-free money, they haven’t done anything about it yet.
If you own more homes that are not your Principal Residence, figuring out how much profit you get to keep in your pockets after the sale of these assets gets a little more complicated. A lot of people make money by selling second homes, of course. The profit from the sale of your vacation home will be taxed, but it can still be very profitable.
WHAT ARE CAPITAL GAINS?
Capital Gains are a profit from the sale of an asset or an investment. Common investments are real estate, stocks, shares & securities, but it’s up to the CRA to determine what they consider “Capital Property”. Money you make from the disposal of these “assets” is taxed at a different rate than money you make from other sources. The “too” simple way of looking at it:
- If you run a business, then 100% of your profits can be taxed.
- If you sell an investment, then only 50% of your profits can be taxed.
Tax brackets vary by province, but the more you make, the higher your tax-bracket. Rounding down, the combined federal & provincial tax rates in BC for 2019 are:
20% 22% 28% 31% 32% 38% 40% 43% 45% … 49.8% on amounts above $210,371 !!!
Figure out what tax-bracket you’re in, (better yet, get an account to do it), and that’s what you’ll pay on your profits.
The need to invest your money becomes pretty important, because the government will take an awful chunk of it if you don’t. Although the rates haven’t gone up since last year, the amount that the government decided that they can tax has! It’s a bigger take for them, and I wouldn’t expect to hear any apologies.
A quick question I hear frequently from people is about the difference between Capital Gains and “dividends”. No, dividends are not Capital Gains, however, they’re still taxed at preferred rates. To complicate things further, rates applied to dividend-income are different than rates applied to interest-income.
It makes you wonder why Accountants aren’t more popular at house parties?
LIVING IN YOUR OWN HOME - “Principal Residence Exemption”
”Capital Gains” are profit. If you lived in your home for every year that you were the owner, then you are exempt from paying tax on the profit you make when you sell it. Living in your home for one year qualifies it as your Principal Residence for that year. Moving out means that it’s no longer your Principal Residence for that year.
If there was a period of time of more than one year when you did not live in the home, you could be subject to paying capital gains tax on the remainder of the period you weren’t living there. If you changed the use of the home from a rental property to your Principal Residence, (or vice-versa), you may also be required to submit capital gains for the period you didn’t live there.
What qualifies as a Principal Residence?
You can ‘designate’ the property as your principal residence when filling out your taxes. You can own a lease-hold interest in a housing unit, capital shares in a housing co-op… house, cottage, condo, apartment, trailer, mobile home, houseboat… what matters is that you lived there as your Principle Residence.
You must own the property alone or jointly with another person and you or your spouse, (former, current, common-law), or any of your children must have lived there at some time during the year. The land portion of the claim is typically limited to 1.24 acres, but there are exceptions if you can demonstrate that you needed a larger piece of the land to enjoy your home. Use your imagination and your lawyer here… there’s a pond out back, a long driveway, a piece of forest your kids like to play in, you like to ride horses and dirt-bikes, etc.
You didn’t have to report the sale to claim the principal residence exemption before 2016, but they’ve come up with more hoops to jump through in the past couple of years… just more forms with your tax return, really. You have to report and designate your principal residence on your tax return, but don’t make a mistake! Legislation changes all the time, and you may be able to submit a late declaration in some circumstances, but there could be a penalty. There are other caveats that apply for non-residents, as well.
Using Part of Your Principal Residence as a Business
If you’re claiming part of your home for a business, then it follows that you’re only using part of your home as your Principal Residence. You still may be able to claim the entire home as your Principal Residence if some conditions are met:
- There is no structural change to the property for the business
- The main use of the property is as a Principal Residence and business use is ancillary to the main use of the property, (ancillary means, “less important”).
- No Capital Cost Allowance has been claimed on the property, (ie. depreciating the value of the building to account for it’s decrease in value over its life-span as a business asset).
- Government websites mention the use of home daycare services as an example of a home business that would have no effect on claiming it as a personal residence.
Capital Gains Tax
If you have a second home that doesn’t qualify as a Principal Residence, you’ll be taxed on 50% of the net profit when you sell it. NOTE: read that carefully! You are NOT losing 50% of your profit to taxes!
Capital Gains Tax means that 50% of the profit you make is taxable. By comparison, if you had a business, then all of your profit would be taxable. This is the difference between “profit” and “Capital Gains”, and it’s why investing is pretty popular. You are NOT taxed on the entire amount of the profits you make from investments if they qualify as a Capital Gain. Real Estate is just one of many investments you can make.
When doesn’t Real Estate Qualify as Capital Gains?
Consider this in light of the “Principal Residence” items above. House-flippers who haven’t lived in the home for more than a year will likely have to pay Capital Gains Tax, but they could also be subject to full taxation if they’re flipping so frequently that the government decides these home aren’t investments anymore. It could begin to look like these houses are actually assets being bought/sold in a “house-flipping business”. If the government decides that you’re running a business, all the profits could be taxable.
Could you be confused with a house-flipper or have to pay Capital Gains Tax if you buy a home and move out before one year has past? Well, it depends on your reasons. Maybe you unexpectedly have to sell your new home to relocate for a new job in another city, or you’ve got a new baby on the way. Maybe you need an in-law suite to host an ailing family member. Maybe you just got in over your head or lost your job and have been presented with an opportunity to get out before the financial obligations crush you. Naturally, you’d discuss these matters with your lawyer before making any declarations on your tax return, but there are exceptions for unexpected changes in your circumstances. Life happens.
TIME FOR AN EXAMPLE
Home purchased for $500,000 on January 1st
You live in the home for one year, before deciding to rent it out to tenants
* You get a Realtor & Appraiser to determine the value of your home at this point *
They value your home is now $600,000 … after one year of ownership
The next year, you sell your home for $700,000 … after two years of ownership
Your profit is $200,000 in two years
Therefore, the first $100,000 is tax-exempt when the home was your Principal Residence
The next $100,000 will be regarded as a Capital Gain because you didn’t live there
50% of this $100,000 will be taxable as income
Add this $50,000 to your total taxable income, figure out your tax-brackets and pay your taxes.