If I had a million dollar home…

Recently a reader posed a unique Cadillac problem: If he won and then sold a new home, would he have to pay taxes on the capital gains?

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Apparently, this lucky reader (we’ll call him Randy) purchased a $100 lottery ticket and ended up winning a brand new, million dollar, custom home near a popular cottage region in Ontario.

But Randy didn’t want to keep the house. Happy with his current home, Randy wanted to sell the lottery win and keep the money. But he was worried: If he sold the new home would he have to pay tax on the capital gains?

According to the CRA, Randy’s not required to pay tax on his lottery gain — in this case a custom home valued at $1 million. (Click here to read the full answer). If, however, Randy sells the home at an appreciated value, he’ll have to pay tax on the capital gains. That’s because we taxpayers only get an exemption from capital gains taxes when it comes to our principal residence, explains James Gustafson, a certified accountant based out of Victoria, B.C.  All other property — whether it’s an investment property or a lottery win — is subject to tax, at our marginal rate.

So, does that mean Randy would have to pay $311,500 in tax when he sold the home for $1 million (assuming an annual income of $55,000 and a tax marginal rate of 31.15%)?

“No. The original win is not considered income,” explains Gustafson, “and for that reason is tax free.” That means Randy could sell the home for $1 million — the market value of the asset when he took possession of the home — and incur no tax.

But if Randy opted to sell the home for $1.1 million, he would have to pay capital gains tax on the difference between the market value of the win (which is $1 million) and the selling price of $1.1 million. In this case, Randy would pay $7,790 in taxes on the $50,000 taxable capital gain (his marginal rate applied to half the total capital gains, as stipulated by the tax man). For a good tax calculator go to the Ernst & Young site.

“Taxes would be fairly minimal, even if he did sell the home at an appreciated price,” says Gustafson.

Not bad for a $100 ticket.

One comment on “If I had a million dollar home…

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