Ask a tax pro: selling an investment property

Ask a tax pro: selling an investment property

Tax season is upon us (yay), and if you’re thinking about investing in real estate or putting your investment property on the market, there are a number of tax implications to think about. We talked to CPA Nicholas Carriere from Chaggares & Bonhomme CPAs about the tax stuff you need to know as a real estate investor, and asked him to shed some light on a few of the most common tax questions property owners ask.

Q: Do I have to pay tax when I sell my house or condo?

A: That depends on one key thing: whether you're selling your principal residence or an investment property. A principal residence (also known as a primary or main residence) is the home you live in most of the time. You can only deem one residence as your principal residence for a tax year.

When you sell your principal residence, you don't get taxed on the capital gains (the amount you've earned as the property appreciated in value over time). However, you are still required to report the sale on your personal taxes in the year of sale and indicate it was your principal residence. If you own multiple properties, you can choose which one to designate as your principal residence, but you can only do that with one property a year.

Selling a property that ISN’T your principal residence – whether that's a vacation home, a house you rent out or a condo you bought for a family member to live in – is a whole different ball game. For any property beyond your principal residence, you will be taxed on 50% of your capital gains when you sell.

Q: How much tax will I end up paying on my capital gains?

A: It depends on your tax bracket. 50% of the gain gets added to your income in the year you sold the property, which is likely to push you into a higher tax bracket than you’d normally be in.

To minimize how much you pay, be sure to claim any improvements that have added to the total cost of the property. If, for example, you bought a backyard shed or did a kitchen reno, those costs can be added to the initial cost of the home and won’t be taxable. Let’s say you bought a place for $750K. You put in $250K worth of renos, then sold it for $1.25M. Because of those renos, your capital gains will only be $250K, and you would be taxed on $125K (50%).

Q: Should I form a corporation to invest in real estate?

A: That totally depends on you. While it may be beneficial to incorporate for liability reasons, there's no real advantage from a tax perspective unless you already own a corporation and are earning income within it.

Q: Are there any situations in which I WOULDN’T get a capital gains exemption on my principal residence?

A: If you’re a flipper who buys, renovates and sells properties quickly, you may not be exempt from those taxes. According to the CRA, you have to show that you intended to live in the property, usually with the address on your driver’s license or utility bills, and that you ended up selling the property due to unforeseen circumstances (you got an offer you couldn't refuse, your family or work life changed.)

Q: What if I have to relocate for work and can’t live in my home for a couple of years?

A: This is an exception. If you have to move to Calgary or Hong Kong for your job and don't want to sell your place in Toronto, you can rent it out but still keep it designated as your principal residence for up to four years – even if you buy a place in your new location. A good accountant will know the drill and advise you on the ins and outs.

Q: What if I sell my principal residence and move into my investment property?

A: If a property goes from income-producing to primary residence, you’ll be on the hook for the capital gains accrued up until the time you moved in. That's the “change in use” rule and will result in a “deemed disposition” of the property. (In the eyes of the CRA, you will have disposed of the property, even though no sale actually took place.)

You’ll need to get an assessment of the property’s value that year and report it on your return. The good news is that you can defer paying those taxes until you sell, and you’ll be taxed at your tax bracket rate at the time of sale, not at the time of change of use.

Q: It's a tough rental market right now. If I can't charge enough rent to cover my expenses – or find a tenant at all – can I report it as a loss?

A: If you have no tenants (and have been actively searching for new ones) or you're legitimately losing money on a rental, yes, that’s considered a loss and it gets deducted from your income. But if you're showing huge losses year-over-year, that will send a red flag to the CRA, who will want to know why you’re not raising your rent or trying harder to find a tenant.

Q: I only have a principal residence, but I rent part of it out. Does that impact my tax situation?

A: If you're just renting out a room in your house or condo, that won’t impact your property’s designation as a principal residence or your ability to shelter your capital gains when you sell (though you’re still expected to report the rental income).

However, if you’re renting out a self-contained apartment in your house, this can actually reduce your primary residence exemption. For example, if the unit occupies 30% of the house (say the entire basement), you’ll have to pay tax on 30% of your capital gains. Only 70% will be exempt.

Are you thinking about jumping into the market as a real estate investor?

Many of our agents specialize in working with investors, and can give you some great insights into properties (condo or detached) that can get you the best return for your dollar in this market. Connect with a agent today!

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