What are the tax implications of selling my property?
Your home is one of the biggest investments in your life. At some point, however, the time may come to sell it. Selling or disposing of your home could have tax implications, and understanding how they work will save you a massive headache when it comes time to report the sale. Here’s what you need to know about the tax implications of selling or disposing your home.
Sale of a principal residence
A principal residence is the housing unit that you own or co-own and lived in during the year. When you sell your principal residence for more than what you purchased it for, you have an increase in the value of your investment, known as a capital gain. Capital gains are considered income for tax purposes, and must be reported on your tax return. In Canada, 50% of the value of your capital gain is taxable. For example, if you purchased your house at $300,000 and sold it for $700,000, you would have a capital gain of $400,000, and $200,000 of that would be taxable.
If that property was solely your principal residence during the time you owned it, you may be eligible for an exemption on all or part of the capital gain you’re required to report. That exemption is granted under the Principal Residence Exemption. If the property was not solely your principal residence, you may not benefit from that exemption.
There are no rules about how long you had to have lived in the home for it to qualify as a principal residence. You, your spouse or common-law partner, or your children must have “ordinarily inhabited” it within a calendar year, but that doesn’t mean you had to live only in that one residence.
That said, Canada Revenue Agency may do some digging to determine whether the real estate in question was your principal residence. They’ll take a variety of factors into account, including real estate buying patterns and sources of income, when determining if it qualifies as a legitimate principal residence. Additionally, only one property per year per family can be designated a principal residence.
Overseas real estate
Property owned overseas–including seasonal property in the US–can be designated a principal residence so long as the owner or their family “ordinarily inhabit” that property during each calendar year claimed.
Income-earning real estate
Typically, property that is used mainly to generate income is not eligible for the exemption, but short-term rentals through Airbnb could be okay so long as the owner typically occupies the home.
Property purchased for the purpose of selling it
Property that has been purchased for the purpose of being sold is not exempted from capital gains tax. Here we’re talking about people who “flip houses” for income. This means you’ll be charged tax on the gain. In some scenarios, this gain would be considered business income, in other situations it’s considered a capital gain.
On the other hand, if you sold the property at a loss–that is, you sold it for less than you purchased it–that may be considered a business loss or a capital loss.
Consequences of not reporting correctly
If you don’t properly report your real estate sale, you could be subject to a CRA audit and may face penalties.
If you’re looking for guidance on the tax implications of selling your property, contact an experienced accountant at Boyer & Boyer, CPA, who can answer all your questions and help you make the best possible decisions based on your circumstances.