Real estate has long been a much sought after type of investment due to its income earning potential and its historical trend of increasing in value over time. In fact, many believe they will “cash in” by holding real estate in their asset portfolio and eventually selling it for significant profits. However, there are tax implications that threaten to erode any profit you may make in such an investment which should be assessed as early as possible.
When you sell your home, a capital gain will result if the sale price is higher than the cost at which you acquired it, requiring you to pay tax on this gain. There are also situations where you can be considered to have sold all or part of your property even though you did not actually sell it, such as if you change the use of the property or if you die. This, again, would result in the realization of a capital gain or loss to be reported in the year the change of use occurs.
If the property was your principle residence for every year you owned it, you do not have to report the sale on your income tax and benefit return and you do not have to pay tax on any gain from the sale. However, if your home was not your principal residence for every year that you owned it, you have to report the part of the capital gain on the property that relates to the years for which you did not designate the property as your principle residence.
Your principal residence can be any of the following types of housing units:
- a house;
- a cottage;
- a condominium;
- an apartment in an apartment building;
- an apartment in a duplex; or
- a trailer, mobile home, or houseboat.
A property qualifies as your principal residence for any year if it meets all of the following four conditions:
- It is a housing unit, a leasehold interest in a housing unit, or a share of the capital stock of a co-operative housing corporation you acquire only to get the right to inhabit a housing unit owned by that corporation.
- You own the property alone or jointly with another person.
- You, your current or former spouse or common-law partner, or any of your children lived in it at some time during the year.
- You designate the property as your principal residence.
If only a part of your home qualifies as your principal residence and you used the other part to earn or produce income, you have to split the selling price and the cost of the property between the part you used for your principal residence and the part you used for other purposes (for example, rental or business). You can do this by using square metres or the number of rooms, as long as the split is reasonable. You would then report only the gain on the part you used to produce income.
If you change the use of your property (e.g. you change all or part of your principal residence to a rental or business operation or vice versa) and it was your principal residence for any year you owned it before you changed its use, you do not have to pay tax on any gain that relates to those years. You only have to report the gain that relates to the years your home was not your principal residence. In certain situations, the rules for changes in use do not apply.
For further information about the principal residence exemption, please contact Andrea P. Kelly.