Reduce capital gains tax on the sale of a property

In order to minimize the tax impact, choose the property with the higher annual accrued gain as your principal residence.

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From the February/March 2014 issue of the magazine.

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Q: My wife and I own a home and cottage. I have recently retired and we would like to sell both properties and purchase a home on the water. We were thinking of selling our current home and renting for at least one year, making our cottage the primary residence. Is there any way to avoid capital gains tax?

—Mark Lahey, Ottawa

A: If this were a game of Monopoly I would suggest you pray for a “Get Out of Jail Free” card. However the CRA doesn’t consider this a game, so there is no way to get out of paying capital gains tax. “You have one principal residence exemption for tax purposes that you can use either for your cottage or your home,” explains Deb MacPherson, a partner at KPMG Enterprise. “The exemption is applied on a year-by-year basis and requires you to choose, for each year, which property you’ll designate.”

In order to minimize the tax impact, her advice is to designate the property with the higher annual accrued gain. She says you can also reduce the gain by making sure that improvements to the property and costs related to its sale, such as legal and real estate fees, are added to your adjusted cost base. MacPherson notes one final caution: Be sure to “keep your receipts for improvements in case you’re audited.”

Bruce Sellery is a speaker and author of The Moolala Guide to Rockin’ Your RRSP. Do you have your own personal finance question? Write to us at ask@moneysense.ca

2 comments on “Reduce capital gains tax on the sale of a property

  1. Would it be possible for the person in this example to sell the home as his principle residence, capital gains tax free, then use his cottage as his principle residence for 2-3 years, then sell the cottage capital gains tax free, and once all his property is liquidated, move on to rent a condo?

    Reply

    • I purchased a cottage in 1996 and married a couple of years later. The cottage was in my name but when I divorced my husband he wanted his share of the increase in the cottage due to the incredible property increase. He was awarded a substantial amount ( no capital gains was paid by him) and now I would like to sell the cottage. We built a large garage but I do not have the receipts (he held on to the receipts). What is the best way to approach this as I do not have receipts, in order to reduce the capital gains tax?

      Reply

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