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  • Understanding Real Estate Sales - Capital Gain or Income

    Risk management, business investment concept

    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:

    • You, your spouse, your child, or your former spouse must ordinarily occupy the house for some duration during the year. The property can also be a vacation home that you and your family use periodically.
    • To claim the PRE on a bigger lot (more than 1 hectare), you must establish that the land over half a hectare is essential for your home's "use and enjoyment."
    • Restrictions may apply if you rent out part of or your entire home.
    • As a general rule, your family can claim the PRE on only a single home at a time.

    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

    Adeolu Ajayi Professional Corporation is a full-service professional accounting firm dedicated to meeting clients' needs throughout Calgary, AB, since 2014. We provide a broad range of high-quality tax accounting services and advice to independent professionals and small and medium-sized businesses. We have earned the loyalty of our growing clientele by delivering superior accounting solutions and tax preparation services. Contact us today for a free initial consultation!

    Disclaimer

    The information on this site is not intended to be a substitute for professional advice. The information does not take into consideration your personal situation, and as such, should not be used without consultation with an accounting professional who could help you use the information to your greatest advantage. Adeolu Ajayi and Adeolu Ajayi Professional Corporation will not be held liable for any issues arising from the use of the information provided on this site.

    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!





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