A strategy to slash capital gains tax

Prior planning will help minimize the tax hit on property sales

  2

by

Online only.

  2

Q: We own a cottage and a six-plex, which is where we also live full-time. Now we want to sell the apartment building and maybe the cottage and use the funds to buy a new residence in the city. How can we best structure this transition to minimize the capital gains taxes we will owe?

— Liz Kargus, Ont.


Ayana Forward is a certified financial planner in Ottawa:  

A: If you are expecting two rather large capital gains on both properties I would recommend spacing the transactions out over two years in order to lower your marginal tax rate. Spacing out the transactions will also offer you some opportunity to defer the taxes owing over potentially three years instead of one. Also be sure to utilize the principal residence exemption on the portion of the apartment building that applies to your living area.

RE Expert - Ayana ForwardAyana Forward is a real estate investor who also holds the Certified Financial Planner (CFP®) designation. Ayana is fee-based Financial Planner with Ryan Lamontagne Inc in Ottawa, ON.

 

 


Answer from Romana King, senior editor and real estate specialist at MoneySense

A: As Ayana mentioned, the key to minimizing taxes is to try and smooth our the tax hit. The best way is to space out the sale of the properties. That’s because you will need to report the sale of each property, and the subsequent capital gains appreciation, in the year you sold each. Sell both the same year and you have to claim the gains from both in that calendar year. This will pump up your marginal tax rate for that year, forcing you to pay more in capital gains tax. Remember, your marginal tax rate is the percentage of tax that’s applied to your income for each tax bracket. In short, your marginal tax rate is the percentage taken from your next dollar of taxable income at each income threshold.

Let’s use a simple calculation to help us understand. If we assume you live and work in Ontario and that you earn $30,000 in annual income, you would have to pay $5,414 in taxes, based on an average tax rate of 18.05% (assuming no other deductions or credits). Now, sell the cottage and the six-plex in the same year, with the cottage earning you a $200,000 gain and the six-plex providing a $150,000 profit, and you’ll end up paying just a smidge under $75,955 in taxes this year.

But split the sales—so you sell the cottage one year and the six-plex the next year—and you could end up paying just under $40,250 one year and $29,396 the next year. That’s a tax savings of just over $6,300, but talk to a financial planner or a tax accountant as they should be able to help you find more legitimate ways to further reduce the taxes you pay.

RomanaKing_322Romana King is the senior editor and real estate specialist at MoneySense. She is also a licensed real estate sales agent. Follow her on Twitter (@RKHomeowner) or on Facebook. If you have real estate concerns or questions, please email Romana directly at romana.king@moneysense.rogers.com or call her on her direct line at 416-764-1382.

 

Ask a Real Estate Expert: Ask our experts your property or real estate question »


Read more from Romana King at Home Owner on Facebook »

2 comments on “A strategy to slash capital gains tax

  1. Assuming the cottage has been “ordinarily inhabitable” by the couple, they could apply their capital gains exemption to the entire value of the cottage, instead of only part of the value of the apartment building, hopefully maximizing the amount of that deduction. If that’s true, then I would suggest selling the cottage first, and selling the apartment building in the next calendar year to delay capital gains tax, and you would still be able to use the principal residence exemption for that final year of ownership against 1/6 of the apartment building. Am I missing something that excludes this option?

    Reply

  2. Is it possible to split the sale of one property over 2 years? Example: a rental condo. Is there a way to sell one part in Dec. and another part in Jan.?

    Reply

Leave a comment

Your email address will not be published. Required fields are marked *