Cutting down capital gains tax on real estate sales
Defer RRSP contributions to mitigate taxes
Advertisement
Defer RRSP contributions to mitigate taxes
Is there any real estate investment I could invest my capital gains in, without being robbed of paying 50% capital gains tax?
I understand there is an exception for the sale of commercial property.
—Dennis
One of the biggest complaints I’ve heard from real estate investors is the dreaded capital gains tax hit, Dennis.
Stock market investors don’t seem to be nearly as patient. Real estate is generally a long-term hold, while stock turnover tends to be more frequent. Real estate investors often end up with larger capital gains as well because real estate is such a large investment, with a market value worth more than many investors’ stock portfolios.
If a rental real estate investor has claimed depreciation, also known as capital cost allowance (CCA), all past CCA gets “recaptured” and taxed in the year of sale in addition to capital gains tax payable.
A capital gain, Dennis, is 50% taxable. I want to clarify this because you referred to paying 50% capital gains tax. The tax rate for capital gains isn’t 50%. The income inclusion is 50% of the capital gain, with the gain taxable at your marginal tax rate. Even someone with a high income will only pay 27% tax at most on their capital gains (54% top tax rate in Nova Scotia times 50% inclusion rate). Many taxpayers will pay much less than 27% tax, depending on their other income for the year, tax deductions, and province of residence.
As an example, someone with a $25,000 income and a $100,000 capital gain in British Columbia in 2022 will pay about $12,616 of tax–less than 13%–on their capital gain. A $100,000 capital gain for someone with $75,000 of other income in Ontario will generate about $18,930 of tax payable–under 19%. And in Quebec, someone with $150,000 of income will pay about $24,981 of tax or about 25% on a $100,000 capital gain.
I don’t know if I’d call this robbery, Dennis, at least not in a Canadian context. Employment income, interest income and foreign dividends are all taxed at twice the tax rate of a capital gain. Capital gains also benefit from being deferred, whereas other income sources are taxable annually. So, on that basis, capital gains on real estate are pretty tax-efficient.
One drawback with investing in real estate is that it’s all or nothing. If you want to sell $5,000 worth of a mutual fund, stock or an exchange-traded fund (ETF), you can do it. You can split your capital gains over two tax years by selling half one year and half the next. When you sell real estate, though, you generally have a large capital gain all in one year because it’s all or nothing.
There is an exception. if you are paid over a number of years for the sale proceeds by the buyer. In this case, you can claim a capital gains reserve, but it must bring at least one-fifth of the capital gain into income each year, even if you are paid less than one-fifth of the proceeds.
The problem with this strategy is that it is pretty uncommon to sell a property and not get paid 100% of the proceeds on closing. So, in practice, most real estate investors can’t claim a capital gains reserve.
The transfer of a family farm or fishing property to a child can have a capital gains reserve over nine years to split the capital gain over a 10-year period. This is a more feasible capital gains reserve strategy.
Many other countries around the world tax capital gains more favourably. Some countries, like Chile, index your cost base over time, so that your capital gain is based on the inflation-adjusted capital gain. Other countries, like Singapore, don’t charge capital gains tax at all. Canada does exempt certain assets from capital gains tax, most notably qualified small business corporation (QSBC) shares and farm properties, subject to certain conditions.
You can claim capital losses on other investments against your capital gains, but that might not help you, Dennis, if you don’t have other non-registered investments with losses.
One good way to mitigate tax on a real estate sale is to defer registered retirement savings plan (RRSP) contributions or deductions in anticipation of a large income inclusion from the sale of real estate, especially if your tax bracket will be much higher in the year of sale. Or, if you’re like most people and have plenty of accumulated RRSP room, real estate proceeds provide plenty of cash to make RRSP contributions. Keep in mind that net rental income creates RRSP room, so even a retiree can accumulate RRSP room to be used against a sale (though they or their spouse must be 71 or younger to contribute).
You mentioned, Dennis, an exemption on capital gains for commercial real estate. To clarify, there is a capital gains tax exemption for real estate used by a taxpayer to earn income from a business, but rental real estate does not qualify as a “business.” A better example might be a widget maker who sells a warehouse to buy a larger warehouse to build their widgets.
The U.S. has a capital gains exemption for “like-kind exchanges” that I won’t go into here, but the exemption can exclude a rental property from U.S. taxation if the proceeds are reinvested into another rental property, subject to conditions.
A common error made by people who opt for DIY tax advice is to do research on the internet and stumble upon outdated advice or, more commonly, U.S. advice. I’ve had a couple people ask me the same question recently about reinvesting their rental property proceeds–à la U.S. like-kind exchange–to avoid capital gains.
Another consideration for real estate investors who have real estate they want to pass along to the next generation is the potential of an estate freeze. There are ways to lock in a parent’s deferred capital gains and have future growth accrue to children.
Capital gains tax is payable eventually, Dennis, even if you don’t sell, as you are deemed to sell all your capital assets, including real estate, on your death. Death and taxes, as they say. So, eventually, your capital gain will be triggered, one way or the other.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.
Share this article Share on Facebook Share on Twitter Share on Linkedin Share on Reddit Share on Email
Hi Jason:
How much will I be taxed for a $270,00 capital gain (bought @ $435,000 – sold @ $705,000 ).
My annual income is $76,000, and my husband’s $5,000. (50/50 property – BC)
Thank you very much for your time.
Olga
We want to sell a commercial property that we own in Toronto for. apx. 3 million dollars.
Which of the following choices we pay less taxes?
1. If we sell the property and get the full amount in cash
2. or we can exchange it with another property plus some cash
Covid is here. Is the Canadian government planning to tax homes sales?
Good question Olga, I have a similar case and I wondering what response you received.
Hi Jason, Can you please tell me more about how the capital gain in Ontario, Canada is calculated. (Is the down payment included in the purchase price when we sale). I’m trying to figure out roughly how much should I list my main resident property after deducting all expenses (interest, fees & taxes) to arrive at a reasonable profit margin. It’s there a tool or apps that can do that? I searched the internet and couldn’t find any articles explaining this issue. Thank you & very much appreciated! Yan
Due to the large volume of comments we receive, we regret that we are unable to respond directly to each one. We invite you to email your question to [email protected], where it will be considered for a future response by one of our expert columnists. For personal advice, we suggest consulting with your financial institution or a qualified advisor.
.I have a second property that I purchased 1 1/2 years ago for 405,000 which was undervalued at the time I now want to sell it and the value is about 800,000 . I am over 65 yr. and have income of of about 55,000 yr and the property and my income are calculated for ontario canada. what is my capital gains tax and what options are available to reduce it.
Due to the large volume of comments we receive, we regret that we are unable to respond directly to each one. We invite you to email your question to [email protected], where it will be considered for a future response by one of our expert columnists. For personal advice, we suggest consulting with your financial institution or a qualified advisor.
Hi. I wa t to sell a rental property in Ottawa, that I own joinley with my two brothers. The capital gain would be around $2,000,000. So, the capital gain taxed will be $1,000,000,split 3 ways. What would be the tax be roughly on each owner. That’s tax on. $333,333.00. Thanks
Due to the large volume of comments we receive, we regret that we are unable to respond directly to each one. We invite you to email your question to [email protected], where it will be considered for a future response by one of our expert columnists. For personal advice, we suggest consulting with your financial institution or a qualified advisor.
I live in BC I got 250,000 capital gain and my full time employment income is 100,000. So I end up with 26% tax of capital gain?
My friend is her mothers power of attorney who lives in BC. Her mother had to go into a nursing home so my friend will sell her mothers condo. If it sells for $600,000. how much is caprolactam gains or does she have to pay capitol gains
Hello, I owned a condo for 12 years and rented it out the last two years before selling. I have read online that if you lived in your place for at least 2 of the last 5 years that you will not pay capital gains. Is this accurate or can you give me some advice on what I should be claiming.
Thank you,
Mark
Hello,
Can anyone please advise me of Capital Gain Tax on my rental property. I purchased a property in 2016 for around $670k and moved in there making it a principal residence. After little over a year staying in the property I moved with my son due to some medical issues. Then I made this property as a rental property after deemed disposition of the property and after getting the appraisal of the property which came out to be $900k.The property is jointly owned with my son since inception. Now I am planning to remove my name from the property. Will the Capital Gain Tax will trigger even the property has not been sold. Suggestions and advises will be highly appreciated.
Hi I want to sell my cottage but never kept any receipts paid cash to avoid paying tax on everything, so how do I estimate what it cost to build it, it was built in the 90s. I’m 77 and this has me really upset as to how I get a price of what cottage cost to build thank you
Thank you for the question. We invite you to email it to [email protected], where it will be considered for an update or future articles.