4 Things to Know About Real Estate Capital Gains Tax When Selling a Home
Anyone selling real estate should be aware of the taxes and fees involved. One of the most important taxes, the capital gains tax, applies to the profits you make on the sale of your home. Making high-value home improvements can help to lower capital gains tax liability, but there are several other important things to know. Let's take a look at what the tax is, how to calculate your capital gains, and how to minimize impact on your tax return.
What is a Capital Gain, and How Is it Taxed?
A capital gain or loss is the difference between the amount you paid for an asset and the amount you received when you sold it. You have a capital gain if you sell an asset for more than you paid. You have a capital loss if you sell it for less than you paid.
Different types of real estate have different available exemptions and deductions. You will only need to pay a capital gains tax on the sale of your home if you make a profit.
How Do You Calculate Your Capital Gains Tax?
Your capital gains tax can change based on how much profit you made and how long you owned the home. In Canada, the capital gains tax rate on the sale of real estate is 50% of the profits of the sale.
Say you bought your home for $150,000 and sold it for $200,000. Since your profit is $50,000, you would be taxed approximately $25,000.
What Happens if You Don't Report Your Capital Gains?
If you don't report your capital gains from the sale of your home on your income tax return, the Canada Revenue Agency (CRA) could subject you to tax evasion penalties like fines and interest. The CRA may also reassess your tax return and charge you additional taxes.
You can always adjust incorrect income tax returns, although the bureaucratic process can be lengthy.
How Can You Reduce Your Capital Gains Tax?
There are a few ways to reduce the amount of capital gains tax you have to pay on the sale of your home. One way is to increase your ACB by making home improvements or claiming capital cost allowance (CCA) on your income tax return.
You may also claim principal residence exemption, which allows you to exempt some or all of your capital gains from taxation. The property must meet certain criteria:
- It must be housing units, lease, or share in co-operative housing corporations
- You must either partially or entirely own the property
- You, your spouse (either current or former), or your children must have lived in the residence at some point in the past year
- The property is designated as your principal residence
Donating certain types of assets can be a great way to reduce or avoid paying capital gains tax on any profits realized from the sale. When donating assets, it is important to ensure that the charity is registered with the Canada Revenue Agency (CRA) and that the asset itself is qualified for exemption.
Taxes Don't Have to Be Overwhelming
Tax season doesn't have to be overwhelming. In fact, with a bit of knowledge and some careful planning, you can minimize the amount of capital gains tax you have to pay. By following the tips in this article, you can be sure you're getting the most out of your tax return and focus on ensuring an easy move to your next home.