How to sell the cottage without paying capital gains tax

If you sell the cottage, you can claim the principal residence exemption. Here’s when it can work for you

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From the April 2015 issue of the magazine.

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(Getty Images / Christian Aslund)

(Getty Images / Christian Aslund)

The principal residence exemption, which allows you to sell your home without paying capital gains taxes on the increase in value, is one of the most lucrative tax deals out there. But did you know you can apply it to your cottage? The Canada Revenue Agency allows you to claim any property you own in Canada and “ordinarily inhabit” as a principal residence—be that a house, cottage, condo or even a trailer. This means you can claim the property with the highest gain as your principal residence for any given period. Just keep in mind spouses can only claim one principal residence between them at a time—so for any given period, you can’t claim your home and your cottage too.

» Reduce capital gains on the sale of a property

Tax savings: If you’re in a 21% tax bracket in retirement and sell your cottage for a net profit of $400,000 and your principal home for a net profit of $250,000, you’d pay $42,000 in tax. If you chose your cottage (rather than your house) as your principal residence, you’d save $16,000 in tax.

 

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