Capital Gains: How Do They Affect the Sale of Your Home?

Making a profit when selling a home is great. That is, until the seller starts to worry about whether they need to put aside some of those profits for taxes. Home sellers in Canada, however, have some great news. In most cases, people selling a residence here are not subject to capital gains tax, but there are some rules that need to be followed to ensure that the seller qualifies. The following information describes capital gains and home sales, and what sellers have to do to make sure they've followed all the rules.

For informational purposes only. Always consult with an attorney, tax, or financial advisor before proceeding with any real estate transaction.

What Is Capital Gains Tax?

In the simplest terms, capital gains refers to the amount an investment increases in value between the time it is purchased and sold. In Canada, as in many other countries, these gains are often subject to taxes when a gain is realized.

In Canada, 50 percent of the value of any capital gains is taxable. Capital gains can be offset by capital losses going back three years. For example, an individual who sells an investment with a gain in value can use losses from those years to offset it. However, there are many exceptions to this rule. One of the most important for most individuals is the exemption for the sale of a primary home.

Capital Gains and a Primary Home

In Canada, individuals do not owe tax on capital gains related to selling their primary home. To qualify as a primary home, the home has to be the place where the owner lived every year they owned the property. A house that was a vacation house for five years, for instance, before becoming a primary residence, would not be considered a primary home.

Despite the fact that taxes are not owed, the seller still must report the sale on their taxes. If the sale is not properly reported, there is a chance that the capital gains exemption may not apply. The exemption can be requested later on, but a penalty may apply.

More Than One Property? Exceptions to the Rules

In most cases, owning more than one property means paying capital gains when selling the one that is not the primary residence. The exception to this rule is when one primary residence is sold and another is purchased the same year. For instance, if someone buys House B in February, then sells House A in March, they will technically have owned two homes for one month. But, since those where both primary homes sold in the same year, there is no capital gains owed on any profits from the sale.

When Do Capital Gains Apply on Primary Homes?

If a house is owned for multiple years and is not the primary residence for all those years, capital gains applies to the years when it was a second home or investment property. There are specific forms that residents or their tax specialists can fill out to note which years are exempt and which years are not.

When Part Of A Home Is Exempt

What about a home that is partially a primary residence, and partially an investment that produces income? This can include a house where part is rented out, or part is used as a space for a home business. If the income is not the main use of the home and no structural changes have been made, then the house may still be considered a primary residence.

Understanding when a homeowner may owe capital gains can help avoid surprises when it comes time to sell quickly. By figuring out which taxes apply and which the owner is exempt from, they can enjoy their good fortune without a surprise tax bill later on.

For informational purposes only. Always consult with an attorney, tax, or financial advisor before proceeding with any real estate transaction.