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Capital Gains Tax On Real Estate

Posted on July 22, 2013 by Orkhan Raguimov in Real Estate

How Capital Gains Tax on Real Estate affects you

This week I wanted to touch upon capital gains tax on real estate transactions and the impact it has on the sale of your ‘principal’ property. Most of us are aware, and for those who aren’t the sale of the principal property doesn’t have to be reported on your income tax report. So what is a principal property? Canada Revenue Agency defines Principal Property as the following:

“Must meet 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.

The land on which your home is located can be part of your principal residence. Usually, the amount of land that you can consider as part of your principal residence is limited to 1/2 hectare (5,000 square meters), which converts to about 1.24 acres (54,000 square feet).

However, if you can show that you need more land to use and enjoy your home, you can consider more than this amount as part of your principal residence. For example, this may happen if the minimum lot size imposed by a municipality at the time you bought the property is larger than 1/2 hectare.”

– First bullet essentially states that you must live in some sort of a housing unit. Co-operatives for those who don’t know are different than regular housing units or condos because people don’t own the deed to their unit, rather they own shares in the corporation. You can read more on co-ops here

The tricky part comes in the end where it states that principal property is essentially limited to half a hectare or 1.24 acres. So in other words if your property is (for example) 2.5 acres and you realized, let’s say, $500,000 gain on your property over a period of time, $250,000 of that would be subject to a capital gains tax on real estate that you own. Not a lot of people are aware of this aspect, but it is something you should know if you are ever planning on purchasing a large lot.

There is however a possibility of you claiming that you needed more than 1.24 acres to fully enjoy your premises and that comes down to how creative you are in making use of your lot and proving it in court, but you would definitely be in for a long battle! :)

capital-gains-tax-on-real-estate

Capital Gains Tax On Real Estate fact 2

This one might affect many. Let’s assume Sandra lives in a principal property (ex. condo) for ‘x’ amount of years and decides that she wants to move out elsewhere and rent out that unit. Does that property become a rental property and is it subject to capital gains tax? Well, according to CRA once you go from principal to rental you change its use:

“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.”

But, there are some good news here as well! You can still designate this property as your principal property for up to 4 years as long as you do not obtain another principal property, and you must remain a Canadian citizen (obviously!). In other words, if you want to rent out your principal property for 1,2,3 or 4 years and go live elsewhere and then move back in within that timeframe, you will maintain your principal property status and will not be subject to a capital gain tax later on. If, however you rent it out for a period of 5 or more years your property would change its use and would be converted to a rental property at a fair market value at the end of those 4 years.

HOW TO PROTECT YOURSELF

Hopefully a couple of these details shed some light on some common issues that people face every day. Remember, it is always a good idea to have a good accountant as well as a knowledgable real estate agent behind your back. If you have any other questions related to this or anything else ‘real estate’ you can always Contact Me and/or subscribe to my Real Estate Newsletter:

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