How do Capital Gains & Real Estate work?
One of the most commonly misunderstood aspects of selling a property is the impact it can have on your taxes. Often, capital gains are the main source of confusion. Not knowing how they work can make wrapping up the sale of your home a challenge, and even land you in some hot water with the CRA. The good news is, understanding the basics can help ensure that you report your taxable income correctly after you sell—and avoid the headaches associated with making a mistake.
If you’re not sure whether you need to pay a capital gains tax related to the sale of your home, here’s what you need to know…
What are capital gains?
Uncertain about what constitutes a capital gain? You’re not alone. Simply put, it’s an increase in the value of an investment—such as a stock, mutual fund, or piece of real estate. When you sell your investment and see a profit, a specific tax applies. Here’s how it works.
How are capital gains taxed?
It’s a common misconception that the tax rate for capital gains is 50 per cent. Fortunately, this number is inaccurate. It’s actually the rate of inclusion that’s 50 per cent, which means you’ll only be taxed on half your profit—at your marginal tax rate. So, if you’re in a higher bracket, you’ll pay a higher rate on your capital gain than you otherwise would. These calculations apply as much to real estate as they do to stocks.
When you’re figuring out how much you’ll be taxed on the sale of a home investment, differentiating between capital gains and business income is crucial. In the eyes of the CRA, your intention as a taxpayer is key. For example, if you buy a home to flip it for a profit, you’ll need to report the money you make as business income. If you’re purchasing a property to rent it out, its eventual sale profits will likely fall under the domain of capital gains.
If you’re uncertain about how to report the sale of any investment, talk to a financial expert for clarification.
Your principal residence
Fortunately, most homeowners don’t have to pay a capital gains tax when they sell. If your property was your primary residence for the entire time you owned it, you’re exempt!
If the piece of real estate you’re selling served as your home for some years and an income property for others, the capital gains tax you pay will reflect this fact. The same is true if you used part of your property to earn income (running a daycare out of your home would be a good example). A tax specialist can help you determine what you can designate as your primary residence, and for which periods of time.
Selling your home can lead to a tidy profit, but (depending on how you’ve used it over the years) it may also have tax implications. To avoid potential future issues with the CRA, be sure to accurately calculate and report your capital gains. Remember: even if you have help from an accountant, it’s always a good idea to be familiar with the basics!
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