Many people may be thinking about playing the real estate market to take advantage of low interest rates.
Buying and selling real estate normally raises questions about what kind of taxes will have to be paid. It depends on your situation but you might be eligible for special tax exemptions.
If you are selling the home you live in, one potential tax exemption is the principal residence exemption.
This specific tax rule gives you the ability to avoid taxes on any income earned from selling your home.
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This exemption is available to you if you or another qualifying member of your family lived in the house during the year, but the rule can also be extended to other properties you may own.
The exemption is based on a calculation involving the capital gain when selling the house, the number of years that you owned the house and the number of years that you designate it as your principal residence.
If you have a vacation property in addition to your family home, you may be eligible for the exemption when the vacation property is sold, as long as you or another qualifying member of your family lived in the property for a given time.
The exemption can be claimed for only one property per family for each year. If you use the tax exemption for the years you own your vacation property, you can’t use those years against your home designation.
Many parents buy a house or condo for their child to live in while they attend post-secondary school.
It allows the family to earn equity on the property and avoids the child from having to pay rent to someone else.
At the end of the child’s education, the property can be sold and the parents can use the principal residence exemption for the years the child inhabited the property.
As a result, no tax would be paid on the increase in property value since its purchase.
However, when the parents eventually sell their main home, they will not be able to use in their designated years during the period when the child was in school.
What happens if you move out of your house and rent the property?
That represents a change in use for tax purposes and the house would be considered sold at that time.
If it was your principal residence up to that point, no tax will be payable on the deemed disposition if you use the principal residence exemption.
However, on a future sale of the property, any increase in value from the time of the change in use is taxable.
This property would be considered eligible for the principal residence exemption for up to four years after its change in use and you would not be taxed on any increase in value during this elected period.
What happens if you decide to rent out only part of your house?
The government has indicated that as long as the income generated from this activity is ancillary to its main use as a principal residence, the house may still be eligible for the tax exemption.
Owning and selling properties can have significant tax implications and the principal residence exemption is only one issue.
Every situation is different and it is important to consult your adviser if you are contemplating this type of transaction.
Colin Miller is a chartered accountant and senior manager in KPMG’s tax practice in Lethbridge. Contact: colinmiller@kpmg.ca. Miller would like to thank Derek Conte of KPMG for his assistance with writing this article. Information is current to January 18.
