Capital Gains Tax on Real Estate?

[Khel]

Hi all,

Do anyone know the conditions upon which you pay capital gains on a house? Is there a term for living in it or something?

And anyone know how much the % is if you have to pay it?

Thanks!

[blankall]

You don't have to necessarily live in it. It just has to be your primary residence. You are allowed to have one primary residence at any given time.

[Khel]

Thanks Fotze! Much appreciated!

[Cowboy89]

Originally Posted by Khel

Thanks Fotze! Much appreciated!

I'm not sure Fotze's correct. In a personal finance course I took a couple of years ago I was told that you do not pay capital gains tax on real estate if it is deemed your 'primary residence.' However should you have more than one property and you deem them both 'primary residences' at different times (You cannot have more than one primary residence at any given time), then you would have to pay a pro-rata share of the capital gains based on a formula derived from CRA on both properties that has something to do with how many years you owned the properties etc. etc. This of course could have changed in the few years since I tooke the course (2006).

Anyways, best not to leave tax advice to a message board, check with CRA or a tax professional yourself to figure it out for your own situation.

[onetwo_threefour]

Very short version...

The one year thing is a rule of thumb, but carries no legal weight.

The determining factor is demonstrable intention.

If you buy a house to live in it, but then get transferred in your job 3 months after moving into it, no capital gains.

If you buy a house with every intention of renting it, then decide to sell it right after closing, it may be treated as capital gains instead of income.

If you are constantly buying and selling houses, the profit may be treated as income rather than capital gains.

It is technically possible for the government to decide that a property you bought and lived in for more than one year is not capital gains exempt, but it is fairly unlikely. (Imagine if you bought a property, intending to sell it or rent it, but the market was soft so you moved into it and kept trying to sell it the whole time you lived there, but it took longer than a year to sell. In those circumstances, if CRA was aware, they may well try to argue that it was never your intention to use this as a primary residence and that capital gains tax was applicable,)

Cowboy is right, only one principal residence at a time. If you move out of one property you own into another property you own, you can change which is designated as your principal residence. At that point there is a deemed disposition of the property that creates a new adjusted cost base for calculating future capital gains.

[troutman]

http://www.cra-arc.gc.ca/E/pub/tg/t4037/t4037-e.html

Your principal residence can be any of the following types of housing units:

• a house;
• a cottage;
• a condominium;
• an apartment in an apartment building;
• an apartment in a duplex; or
• a trailer, mobile home, or houseboat.

A property qualifies as your principal residence for any year if it meets all of the following four conditions:

• It is a housing unit, a leasehold interest in a housing unit, or a share of the capital stock of a co-operative housing corporation you acquire only to get the right to inhabit a housing unit owned by that corporation.
• You own the property alone or jointly with another person.
• You, your current or former spouse or common-law partner, or any of your children lived in it at some time during the year.
• You designate the property as your principal residence.

[onetwo_threefour]

Forgot to answer the second half of the question...

What you pay will be determined by your personal tax rate and the inclusion rate of capital gains for taxation.

For example, if your personal tax rate is 40%, and 50% of the gain is taxable, then you will pay 20% of the gain in taxes.

For example. Buy a house for $300K sell for $400K

Gain is $100K (assuming that you don't have any capital expenditures you can offset the gain with)

Inclusion rate for Capital gains is 50%, therefore you only have to pay tax on $50K

On that $50K you pay your marginal tax rate. If your tax rate is 40% then you will pay $20K. (i.e. 20% of the total gain)

This is a super simple example, but that is basicaly how it works.

[red sky]

Sorry to bump this thread but I have a quick question regarding capital gains on real estate. Let's say that I owned a townhouse for 7 years and took out equity on the place to put towards a downpayment on a new house in which I will reside in. I keep the townhouse and rent it out for a year as I didn't want to sell it in the downturn. Now that things have improved, if I sell the townhouse now would I have to pay capital gains? Is there any way to circumvent this? i.e. declaring the rental as my primary residence?

TIA

Oh and I googled capital gains on real estate and this thread was on the first page. Craziness!

[troutman]

http://www.cra-arc.gc.ca/E/pub/tg/t4...l#P4321_160669

Changes in use

You can be considered to have sold all or part of your property even though you did not actually sell it. The following are some sample situations:

• You change all or part of your principal residence to a rental or business operation.
• You change your rental or business operation to a principal residence.

Every time you change the use of a property, you are considered to have sold the property at its fair market value and to have immediately reacquired the property for the same amount. You have to report the resulting capital gain or loss (in certain situations) in the year the change of use occurs.

If the property was your principal residence for any year you owned it before you changed its use, you do not have to pay tax on any gain that relates to those years. You only have to report the gain that relates to the years your home was not your principal residence. For information on how to calculate and report the gain, if any, see "Disposing of your principal residence".

If you were using the property to earn or produce income before you changed its use, see "Real estate, depreciable property, and other properties" for information on how to report any capital gain or loss.

Special situations

In certain situations, the rules stated above for changes in use do not apply. The following are some of the more common situations.

Changing all your principal residence to a rental or business property

When you change your principal residence to a rental or business property, you can make an election not to be considered as having started to use your principal residence as a rental or business property. This means you do not have to report any capital gain when you change its use. If you make this election:

• you have to report the net rental or business income you earn; and
• you cannot claim capital cost allowance (CCA) on the property.

While your election is in effect, you can designate the property as your principal residence for up to four years, even if you do not use your property as your principal residence. However, you can only do this if you do not designate any other property as your principal residence for this time.

You can extend the four-year limit indefinitely if all of the following conditions are met:

• You live away from your principal residence because your employer, or your spouse's or common-law partner's employer wants you to relocate.
• You and your spouse or common-law partner are not related to the employer.
• You return to your original home while you or your spouse or common-law partner are still with the same employer, or before the end of the year following the year in which this employment ends, or you die during the term of employment.
• Your original home is at least 40 kilometres (by the shortest public route) farther than your temporary residence from your, or your spouse's or common-law partner's, new place of employment.

If you make this election, there is no immediate effect on your income tax situation when you move back into your residence. However, if you change the use of the property again and do not make this election again, any gain you have from selling the property may be subject to tax.

To make this election, attach to your return a letter signed by you. Describe the property and state that you want subsection 45(2) of the Income Tax Act to apply.

If you started to use your principal residence as a rental or business property in the year, you may want information on how you should report your business or property income. If so, see Guide T4002, Business and Professional Income or Guide T4036, Rental Income.

[red sky]

I wonder, is it possible for me to claim the townhouse rental unit as my principle residence and my fiance claim the new house as her principle residence? I actually haven't declared any rental income at the moment but I am pretty much breaking even with condo fees and property taxes.

[red sky]

Scratch that, it seems if I only rented it for one year that I won't have to pay capital gains on it... or that's the way it seems when calculating it out.

[red sky]

Originally Posted by fotze

I think you would pay the gains based on the value you sell it minus the value when it became a rental unit.

According to this schedule: http://www.cra-arc.gc.ca/E/pbg/tf/t2...091ind-09e.pdf

It takes the difference between the years that I owned it and the years it was a rental however line 19 shows that you take the years it was my primary residence and adds one which would then result in the exact same numbers in line 17 and line 22 and thus no capital gains. If you see it otherwise let me know though.

[username]

Red Sky,

If you owned 2 properties at the same time while one was not your primary residence then you're liable to pay the gain/loss that property incurred over the year. Should you get audited they will likely see this and hit you up for the gain.

My advice to you would be to have your townhouse appraised as of the date you took your money out. Then just take the proceeds from your sale and subtract the sum of (appraised price - appraisal cost) to come up with a gain/loss.

Well, that's what I would do just to be safe. The last thing you want to have happen is to get audited 7 years from now and the government deems you owed 10K in taxes that were not paid. Not only would you now owe that 10K, but also be accountable for 7 years of compounded interest at a pretty ridiculous rate.

[red sky]

Originally Posted by username

Red Sky,

If you owned 2 properties at the same time while one was not your primary residence then you're liable to pay the gain/loss that property incurred over the year. Should you get audited they will likely see this and hit you up for the gain.

My advice to you would be to have your townhouse appraised as of the date you took your money out. Then just take the proceeds from your sale and subtract the sum of (appraised price - appraisal cost) to come up with a gain/loss.

Well, that's what I would do just to be safe. The last thing you want to have happen is to get audited 7 years from now and the government deems you owed 10K in taxes that were not paid. Not only would you now owe that 10K, but also be accountable for 7 years of compounded interest at a pretty ridiculous rate.

What do you mean by:

"My advice to you would be to have your townhouse appraised as of the date you took your money out."

You mean when it is sold?

It seems like the government is giving me one year to sell it though when it is a rental property. Again according to the tax schedule linked in the above post. Can any accounting folks confirm this?

Note: I haven't sold the rental, the tenants are interested in renewing in September but I was thinking now that the market has recovered a bit that I would like to sell it.

[troutman]

Every time you change the use of a property, you are considered to have sold the property

[red sky]

Originally Posted by troutman

Every time you change the use of a property, you are considered to have sold the property

I understand that however it also says:

If the property was your principal residence for any year you owned it before you changed its use, you do not have to pay tax on any gain that relates to those years. You only have to report the gain that relates to the years your home was not your principal residence. For information on how to calculate and report the gain, if any, see "Disposing of your principal residence".

So I have to pay the gain that relates to the years when my home was not my principal residence. Lets say my capital gains on the house would be $150,000 according to the purchase price and the estimated sale price minus realtor fees. According to the schedule this would be line 17. The following is calculated to determine the capital gains from renting it.
Starting with:

Line 18: (=line17) Capital gains before principle residence exemption: 150,000
Line 19:Line 3 (# of years delegated as principle residence) plus 1 (one year granted by law): 7 + 1 = 8
Line 20: Line 18 x Line 19 = 150,000 x 8 = 1,200,000
Line 21: = Line 6 (Number of years owned) = 8
Line 22: 1,200,000/8 = 150,000
Line 23: Net capital gains: Line 18 - Line 22 = 150,000 - 150,000 = 0

Really it is the plus 1 in line 19 that brings me back to not owing any capital gains if I sell it within the year.

[red sky]

Originally Posted by fotze

Yes, that calculation doesn't jive with the words.

Calc > Words

I wish... I seems too good to be true but even then I think my capital gains would be lower than I originally thought.

[cal_guy]

The gain from the period that you originally bought the townhouse to the moment you converted it to a rental property is covered by the personal exemption. So let's say you bought the townhouse for $200,000 and the fair market value of your townhouse when you converted it to rental was $350,000 that $150,000 gain is covered by the personal exemption and $350,000 is the new cost of the townhouse. If you were to sell your townhouse say for $375,000 than you have $25,000 of capital gains to account for or $12,500 additional taxable income since capital gains are included at a 50% rate.

[username]

Originally Posted by red sky

"My advice to you would be to have your townhouse appraised as of the date you took your money out."

You mean when it is sold?

Nope, I mean the day you took possession of your new place which is the day your old place became a rental property. That's the date you need to have it appraised at and then the date you sold it at would be the price you use (minus selling costs) to come up with your proceeds.

Does that make sense?

Oh and believe me, you have to do it this way, I just went though something very similiar and had my CA buddy do my capital gains tax portion for me. Think about how many people would flip houses every year if people didn't have pay capital gains on a property in your situation?

Basically what I'm saying is I wouldn't risk it. If you feel you can get away with it, go for it but I'm too conservative to risk something like this.

[red sky]

So it seems that Cal guy and username are saying the same thing. That still means less capital gains than I originally thought. I am okay paying a few grand due to the price appreciation in the past year.

Thanks all!