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The information in this article is general in nature and is not intended to replace professional advice. If you have any questions about capital gains tax or the principal residence exemption, be sure to speak with a qualified tax professional.
The principal residence exemption allows you to sell your home without paying capital gains tax on the sale. However, there are some important rules that you need to be aware of in order to qualify for the exemption. Here are 5 common questions about the exemption and capital gains tax:
1. What is the capital gains tax?
The capital gains tax is a tax on the profit you make when you sell an asset for more than you paid for it. The tax is calculated on the difference between the “selling price” and the “adjusted cost base” of the asset. In other words, tax is effectively calculated based on any profit you made from the sale of your home.
2. What is the adjusted cost base?
The adjusted cost base is the original cost of an asset, plus any improvements made to it, minus any depreciation claimed. In other words, this is the estimated base value of your property before accounting for market appreciation.
3. How do I calculate my capital gain?
To calculate your capital gain, you take the selling price of the asset and subtract the adjusted cost base. If the result is a positive number, then you have a capital gain and you may be subject to tax on that gain. In order to calculate the potential capital gains tax on your sale you need to then multiply the rate of your capital gains tax against the total value of your capital gain (i.e. (selling price - adjusted cost base) x capital gains tax).
4. What if I sell my principal residence?
The CRA’s principal residence exemption can exempt your gain from tax if you sell your home. To qualify, the home must have been your primary residence for at least part of the time you owned it. There are other conditions that must be met in order for the exemption to apply, so be sure to check with the CRA or a qualified tax professional before claiming this exemption.
5. What is the Anti-flipping tax?
The federal government has introduced an anti-flipping tax which is designed to discourage people from buying and flipping properties for a profit. The idea is to curb the cost of home ownership, by taxing and discouraging profit seekers who are looking to buy and flip a property in the short-term. This is intended to make the same type of property more available to buyers who intend to be resident homeowners instead. Strictly, speaking this tax will apply to home owners who have held a property for less than 12 months. However, a number of exceptions apply, so owning a home for 1 year or more may not automatically exempt you from capital gains tax. Additionally, the province of BC is contemplating it's own anti-flipping tax, which if implemented may apply to homes owned for less than 2 years. The specifics of this new provincial tax are yet to be determined and could have retroactive implications for current homeowners today.
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