Three ways to save on capital gains tax when selling a secondary property
Typically, half of the gain is taxed at the seller's marginal tax rate
Selling a secondary property, like a cottage or a condo, can net a significant profit, but also result in a hefty tax bill.
Profit on the sale of a secondary property is subject to the capital gains tax, meaning half of the gain is taxed at the seller's marginal tax rate.
However, there are a few tricks sellers can use to lower their taxable capital gains.
Split the principal residence exemption
The principal residence exemption allows Canadians to sell their primary home without paying tax on the profit. For people with multiple properties, they can strategically split the exemption between their homes to lessen their tax burden.
Choosing which properties you want to be exempt comes down to math, says Cindy Marques, a certified financial planner and director of financial planning at Open Access Ltd.
Do I want to prioritize my cash flow today or down the line?Cindy Marques, certified financial planner
"Whether you're selling the cottage or you're selling the actual house, you might want to consider, what did I buy both of these properties for, and how much did they appreciate up until this date?" she said.
If you're selling the cottage and you don't want to deal with a large tax bill now, you could designate it as your principal residence for all or some of the years, so that the taxable gain is entirely exempted or significantly reduced, she says.
The caveat is the actual home will not be eligible for the principal residence exemption during those years.
Life insurance is also a factor to consider, she says, because it can deal with an individual's final tax bill upon death.
If you don't have life insurance and don't want a large tax bill eating into your estate upon death, it's probably best to save the principal residence exemption for your actual house, she says. However, if a life insurance payout is going to cover most or all of your estate's tax liability, then you can designate the secondary property as your principal residence to maximize the profit on the sale immediately.
"It's a matter of choosing, do I want to prioritize my cash flow today or down the line?" Marques says.
She notes a rental property or renting a portion of your home can complicate matters because the principal residence exemption is not applicable or otherwise pro-rated to the part of the home that's not used as a rental, depending on the owner's unique situation.
"There's no magic formula," said Gerry Vittoratos, a national tax specialist at tax filing software firm UFile.
"You have to decide which one's going to generate the bigger profit, and whichever generates the bigger profit, that's the one I'm going to choose to exempt," he said.
Luckily for homeowners, the government has a fairly low bar for claiming a property as a principal residence, he says.
With a cottage, for example, Vittoratos says if the owner stayed for at least a weekend at some point during the year, that is likely enough to be able to apply the exemption to the property.
Claim all sale expenses
The process of selling a property can be expensive between legal fees, realtor commissions and house repairs.
The good news is all of these can be deducted from the gain, Marques says.
"Finders fees, commissions to realtors or brokers, legal fees, land transfer taxes, advertising costs to list it – whatever is required to find a buyer. So, pretty standard things upon looking for someone to buy it and executing the sale of the property with professionals, all of those costs can be deducted from the actual gain. It's more like it's added to your cost basis," she said.
Claiming renovations can be a bit tricky though because they need to be essential in order to sell the property.
Aesthetic renovations such as fresh coats of paint don't qualify, Marques says, but repairs to the roof, foundation, basement can all likely be claimed since they're integral to the structure.
Use capital losses to offset gains
A secondary home is considered capital property, just like stock market investments, so losses from one could be used to offset gains from the other.
It's akin to tax-loss selling strategies investors often use in December, Vittoratos says.
If the property owner has incurred stock market losses in a non-registered account in the current or previous years, they could use them to lower the taxable capital gain generated by the property sale, he says, which can be helpful when the primary residence exemption isn't applied.
Michelle Zadikian is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @m_zadikian.
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