Real estate is a wonderful investment to make, and many people in Toronto are continuing to take advantage of the low interest rates. Unlike many investments, when we sell our principal residence, we are not taxed on the increase in value due to the principal residence exemption. If you have lived in your house from the date of purchase to the date of the sale, no capital gains tax (tax on the increased value of the home) will be owned. However, properties which are not “ordinarily inhabited” by the owner are subject to capital gains tax.
Capital gains tax is calculated by determining the value of the house on the day that it is purchased and the value on the day it is sold or disposed of. 50% of the increase in value is added to the owner’s income and is taxed as such. For example, if Tom bought an income property in 2000 for $200,000 and sold in 2013 for 350,000, the increase in value is $150,000. Half of that amount, or $75,000, would be added to Tom’s income in that year.
For each year of ownership, one property is designated as the principal residence. Only one property may be designated as a principal residence in any given year. The ownership of a cottage property as the family vacation property for example, could be designated as the principal residence, even though this may not in fact be the year-round family home. Playing around with the numbers in such a circumstance would be advisable to determine which home saw the largest increase in that year. Such a designation does not need to be made until one of the properties owned is sold.
Whether capital gains tax is payable is fairly self-evident when only one property is owned and it is the principal residence, or when a property is used as an income or rental property throughout the year. However, the question becomes more complex when property is used for multiple purposes and may lead to uncertainty among homeowners. For example, the use of a basement apartment as a rental unit may cause the home to lose its designation as a principal residence if more than 50% of the home is used as a rental or if the owner claims capital cost allowance on his or her income tax return.
The capital gains tax rules are complex and it is advisable to speak to your Toronto Real Estate lawyer to discuss the tax implications of your real estate purchase or sale.