Slash capital gains tax with this property sale strategy

A strategy to slash capital gains tax

By Romana King on August 19, 2016
Estimated reading time: 3 minutes

Prior planning will help minimize the tax hit on property sales

This article is 9 years old. Some details may be outdated.

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. Ayana 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. Romana 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 [email protected] 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 »

Comments Cancel reply

Jacks on Tax

A wish list for Carney’s fall budget

6 proposals to help low-income Canadians get smarter about money and close the growing wealth gap.

A wish list for Carney’s fall budget

Financial literacy

The best free personal finance and investing courses in Canada

Canadians have more options than ever to learn about personal finance. Here are the best free courses available—online or...

The best free personal finance and investing courses in Canada

Ask MoneySense

Do you pay GST/HST when you build or renovate a house?

New homes generally have sales tax payable. What if you build or substantially renovate your home?

Do you pay GST/HST when you build or renovate a house?

ETFs

Which ETFs are the most tax-efficient for Canadian investors?

How taxation of ETFs works in non-registered accounts, and some fund suggestions that will allow you to keep more...

Which ETFs are the most tax-efficient for Canadian investors?

Photo of different amounts of money to symbolize tax brackets in Canada, both federally and in the provinces and territories.

Taxes

Canada’s income tax brackets for 2025, plus the maximum tax you’ll pay based on income

Want an idea of how much tax you paid—or will be paying—for 2025? Here are the federal and provincial...

Canada’s income tax brackets for 2025, plus the maximum tax you’ll pay based on income

Ask a Planner

“We’re well off in retirement. How can we pay less tax?”

A financial planner explains some tax-saving strategies that Canadian retirees may not have thought of.

“We’re well off in retirement. How can we pay less tax?”

Woman sitting at a desk, reading, with papers in her hand.

Taxes

How the Canada GST/HST tax credit works

Curious to know if you’re eligible for a recurring credit? Discover whether this quarterly benefit could add tax-free cash...

How the Canada GST/HST tax credit works

A man and woman hug in their living room

Ask a Planner

How can couples avoid capital gains tax on property in Canada?

A MoneySense reader asks what tax and probate implications she might face if she inherits a rental property held...

How can couples avoid capital gains tax on property in Canada?

A man and woman discuss a document in their living room

Ask a Planner

Tax implications of giving your spouse money to invest

A MoneySense reader wants to give money to his spouse to invest. Can he avoid Canada’s income attribution rules?

Tax implications of giving your spouse money to invest

A woman checks her investments on a tablet

Ask a Planner

How is investment income taxed in Canada?

A MoneySense reader wants input on the tax implications of her investment withdrawals, but she can’t get a straight...

How is investment income taxed in Canada?

A strategy to slash capital gains tax

Ayana Forward is a certified financial planner in Ottawa:

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

Comments Cancel reply

Related Articles

A wish list for Carney’s fall budget

The best free personal finance and investing courses in Canada

Do you pay GST/HST when you build or renovate a house?

Which ETFs are the most tax-efficient for Canadian investors?

Canada’s income tax brackets for 2025, plus the maximum tax you’ll pay based on income

“We’re well off in retirement. How can we pay less tax?”

How the Canada GST/HST tax credit works

How can couples avoid capital gains tax on property in Canada?

Tax implications of giving your spouse money to invest

How is investment income taxed in Canada?

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