Understanding Real Estate Sales - Capital Gain or Income
When you sell an asset for more than it cost to acquire, the difference is referred to as a capital gain. In most situations, the profits you make from a profitable sale of a property are taxable. Depending on how long you hold on to an asset, the Canada Revenue Agency (CRA) can subject you to two main types of tax on capital gains: short-term and long-term capital gains tax.
The two are taxed differently and come with pros and cons. For example, if you held the property for a year or less before selling it, the net profit made out of the sale will be considered a short-term capital gain and is taxable as ordinary income. However, you'll only need to include half of your capital gain in taxable income. On the other hand, long-term capital gains are taxed for assets held for more than a year. The tax rates for long-term capital gains are usually lower and based on your tax bracket.
Capital Gains Tax for Primary Residence
Selling your primary home is usually entitled to special treatment regardless of how much profit you make out of it. However, the process is not as simple as selling a home you live in. You will need to meet the following two conditions to get the primary residence exclusion:
When you sell a home that was solely your primary residence for all the years you owned it, the CRA does not require you to pay tax on the gain. However, if the property was not your principal residence at any time during your ownership period, you might not benefit from the primary residence exemption.
Capital Gains for a Second Residence
If you live in a primarily rental property for part of the year, it is considered a second residence. For example, if you have a condominium at the beach that you live in for two months each summer and also rent out for one month, it is likely considered a second home. To benefit from the principal residence exemption ("PRE"), you must meet specific requirements:
Capital Gains on Investment Property
There are two types of taxation that you can be subjected to when you sell an investment property. First, if you sell the investment property for a net profit relative to your cost basis, the CRA requires you to pay capital gains tax.
Additionally, if you've claimed any depreciation expenses on that property during your ownership period, the cumulative amount you've deducted is considered taxable income when you sell. Often applied to rental properties, this concept is known as depreciation recapture.
Expert Assistance for Real Estate Professionals
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About The Author
Adeolu Ajayi is a Chartered Professional Accountant and the founder of Adeolu Ajayi Professional Corporation. Adeolu provides valuable tax planning, accounting, and income tax preparation services in Calgary, AB, and environs. Call us today for a consultation!
Adeolu Ajayi, CPA, CGA, FCCA | 05/13/2021