6 Things to Know About Capital Gains When Selling Your Home
If you're selling a house, you may have questions about capital gains. Do you owe taxes on capital gains? What are capital gains? Is there any way to avoid paying capital gains taxes? These questions are natural. Having the right answers can help you make the most money possible during the home selling process while staying compliant with Canadian tax code. The following information answers six common questions regarding capital gains.
What Are Capital Gains Taxes?
A capital gain is an increase in the value over the adjusted cost base of an investment, and capital gains taxes are taxes paid on those gains. Fifty percent of capital gains are taxable in Canada. This means that homeowners who sell their property that is taxable in this way must add 50% of their capital gains to their income and pay taxes on it.
What Is the Adjusted Cost Base?
The adjusted cost base is the original price the homeowner paid for the property, plus the cost of any improvements that have been paid over the years. For example, if a homeowner purchases a house for $200,000, and then remodels the house for an additional $100,000, then the adjusted cost base is $300,000.
The only way to prove adjusted cost base is for homeowners to keep all receipts over time, including the paperwork filed when the home was purchased, contracts from contractors, builders and handy men who make improvements to the house, and receipts from fixtures and other items that were purchased over the years. This paperwork will become important when trying to do taxes after selling a house wherein capital gains are incurred.
Can You Add Everyday Costs to Your Adjusted Cost Base?
No, a homeowner cannot add everyday costs to their adjusted cost base. For example, the cost to heat and cool the home throughout the years is considered an everyday cost. Utility bills cannot be added to the adjusted cost base. However, the cost to replace the HVAC system can be used to increase the adjusted cost base. Working with an accountant can help the homeowner determine which costs can be added to the adjusted cost base, and which costs cannot.
It's important to note that costs incurred making repairs are not considered improvements. For example, if in the scenario above, the homeowner chose to repair the HVAC system instead of replace it, those costs would not be considered improvements and could not be added to the adjusted cost base.
However, in some cases, repairs to a property may be tax-deductible. Homeowners in Canada who are making repairs to their property should check with their accountant to find out whether changes they're making to their property qualify for these deductions.
Do You Have to Pay Capital Gains Taxes on Your Primary Residence?
Homeowners in Canada do not have to pay capital gains taxes on their primary residence—as long as it was always used as their primary residence the entire time they lived in their home. Homeowners that at one time used their home as a vacation home or rental property must pay capital gains taxes on that property when it is sold.
How Do You Calculate How Much You'll Have to Pay?
Consider again a home that is purchased for $200,000, then is remodeled for $100,000. The adjusted cost base is $300,000. Now imagine the house is sold for $350,000.
$350,000 - $300,000 = $50,000. The capital gain is $50,000. The homeowner must pay taxes on 50% of the capital gain, so the homeowner must add $25,000 to their income when they pay taxes.
What If You Sell the House for Less Than Fair Market Value?
Selling a house at a discount does not enable a homeowner to avoid capital gains taxes. In the circumstances that a home is sold for less than fair market value, the homeowner must use the fair market value of the property to calculate potential capital gains. A real estate agent can help the homeowner determine fair market value, and an accountant can help the homeowner determine how this must be documented in the home selling process.
Still Have Questions About Capital Gains? Check With Your Accountant
The best way to understand capital gains taxes when selling a home is to work with a professional who understands tax code. An accountant can ensure you are doing your part to pay what is owed after selling a home.