Did you recently sell a property and make a gain on its sale? Are you wondering whether there is any tax to pay on this sale?
If the property has been designated as your principal residence for the entire length of ownership, then there are no tax implications. To qualify as a principal residence, the property must have been owned by you or jointly with another person. Additionally, you, your spouse (current or former), or any of your children must have lived in the property for some period of time.
You are only allowed to designate one property per year as your principal residence. Situations that tend to complicate tax matters occur when more than one property is owned during the same time period.
When this occurs, you should designate the years of principal residence to the property with the highest capital gains on a per year basis. This will help minimize income taxes throughout your life, whereas designating all the years to the first property sold will simply minimize taxes in the first year of sale.
What properties are eligible for the principal residence exemption?
- Apartment (in an apartment building or duplex)
- Trailer, Motor Home, or Houseboat
How do I calculate my exemption?
(1 + # of years designated / total # of years owned) x Capital Gain = Principal Residence Exemption
You own two properties:
- House – purchased in 2001 for $350,000
- Cottage – purchased in 2005 for $150,000
In 2014, you sold your house for $500,000 and moved into your cottage (which had a market value of $200,000).
- Initial purchase price: $350,000
- Sale price: $500,000
- Gain: $150,000 ($500,000 – $350,000)
- # of years owned: 14
- Gain per year: $10,714
- Initial purchase price: $150,000
- Sale price: $200,000
- Gain: $50,000 ($200,000 – $150,000)
- # of years owned: 10
- Gain per year: $5,000
This example shows the accrued gains per year on the house is higher than the accrued gains on the cottage. Therefore, designating it as the principal residence for all those years is the most appropriate tax decision. This would result in the entire gain on the sale of the house begin exempt for tax purposes. Going forward, the cottage can claim the principal residence designation.
If you are considering selling a property and have further questions, you should contact your accountant at once for helpful advice!