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Remember the plus one year rule if you once used the rental property as your principal residence
Q: I bought a house in 2010 for $600,000 and lived in that house as my principal residence until 2013. Then I bought and moved into another property. I rented out the first house and reported all income on my tax returns. In 2016, I sold the rental property for $900,000. When I file my tax return for 2016, how much capital gains am I supposed to declare and report to the CRA? Is it $900K minus $600K, minus the cost of disposition; or $900K minus whatever the deemed fair market value of the property at the time when I moved out in 2013, minus the cost of disposition?
— Wallace, Toronto
You are entitled to a principal residence exemption for the time you lived in the residence—between 2010 and 2013. The formula for calculating your principal residence exemption also includes an extra year so you will have four years of exemption according to the formula.
The formula is as follows:
((# of years home is principal residence + 1)/# of years home is owned) x capital gain
Your capital gain before factoring in the principal residence exemption is your proceeds of disposition ($900,000) minus your purchase price ($600,000), which works out to $300,000.
Using the above formula, your principal residence exemption is:
((3 + 1)/6) x $300,000 = $200,000
Your capital gain after factoring in the principle residence exemption is $100,000 (as $300,000 minus $200,000 = $100,000). Because it’s a capital gain, the CRA will only charge you tax on 50% of that gain, resulting in a taxable capital gain of $50,000.
The amount of tax you pay on that $50,000 will depend on your marginal tax rate.
To report the sale and tax owed, you must complete form Form T2091(IND) Designation of a property as a Principal Residence by an Individual (Other Than a Personal Trust) and file it with your income tax return.
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.
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This is wrong.. when you started renting your house in 2013, there is a deemed disposition meaning you have sold and bought back the house at the fair market value as of 2013. the gain you file in 2016 will be the proceeds less the FMV in 2013 less cost of disposition. Unless you filed a 45(2) election, you will have to pay capital gain tax.
MO is right. In my case I made the election instead of the change of use. I only wish I’d known the market would decrease, then I wouldn’t have made that election, but I guess I can’t tell the future. Question though, now that I’ve sold the rental house part year, can I still claim pro-rated property tax? The new owners of the house would have got the bill, I don’t have it – for 2019.
I have purchased a commercial and residential property for $165,000 in 2005.
and sold the property for $800,000 in 2021. Its a 50-50, Principal residence on first floor and ground floor commercial. The Municipal assessment for 2021 is $150,000 for residence and $250,000 for commercial. How is the capital gains calculated?
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.