How to calculate capital gains on the sale of an income property - MoneySense

How to calculate capital gains on the sale of an income property

If you’ve used your home as both a primary residence and a rental property, the calculation is a bit tricky. Here’s what to know.

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Q. I plan to sell my property, which was my primary residence from 2007 to 2016. In 2017, I rented it out until now. If I’m selling now, how will the capital gain be calculated?
– Gus

A. Hi, Gus. In Canada, individuals are exempt from paying capital gains tax on the sale of their principal residence. If your house is a principal residence for the entire time you own it, all you need to do is report the sale of the property on form T2091 on your tax return in the year you sell it and claim the full principal residence exemption.

However, if your house has been both a principal residence and an income generating property for the time you have owned it, then a portion of the capital gains tax will be payable. To calculate the capital gains, you will need to know three things: the original cost of your house when you purchased it in 2007, the fair market value (FMV) of your house when you started renting it, and the selling price of the house.

Here’s an example:

2019 Sale price                                               $650,000

2007 Purchase price                                  – $185,000

Capital gain                                               $465,000

The exempt portion of the capital gain:

2016 Fair market value (FMV)                     $500,000

2007 Purchase price                                    – $185,000

Principal residence exemption           $315,000

Taxable capital gain = Capital gain – Principal residence exemption

So, taxable capital gain =  $150,000

The tricky part of this exercise is determining the 2016 Fair Market Value (FMV) of your house. You could look at what similar houses were selling for in your neighbourhood, or look at the yearly assessed value for property taxes. While it’s not necessary to get a professional appraisal for this purpose, it helps. Without the appraisal, you may have to justify your thought processes and provide evidence of how you arrived at the Fair Market Value to a Canada Revenue Agency (CRA) agent. With a professional appraisal, there’d be no justification required.

Theresa Morley, CAP, CA is a partner with Morley Chartered Accountants in Barrie, Ont. You can read her blog here.

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