Tax Impacts of Real Estate Transactions

Disclaimer This article is not intended to be specific advice, it is recommended that you consult with a tax professional about your specific transaction and circumstances. The tax treatment of a real estate transaction is dependent on the circumstances around how that property was used during the period of ownership. This article is intended to provide some clarity on the general rules that guide the treatment of these transactions.

Sales of Principal Residences

A principal residence is a home that you or a member of your family unit regularly inhabited during the period of ownership. If you, or a member of your family unit, lived in a property it is generally exempt from capital gains tax on the appreciation of that property during the period it was owned. However, only one property can be designated as your personal residence for a specific time period. Some important considerations are outlined below:

If your family unit only owns one property at a time, you will be exempt from paying tax on the entire capital gain on that property. It is important to note that you still need to report the disposition on your personal tax return and elect to claim the principal residence exemption for the period the home was owned.
If you own more than one property that could be considered a principal residence at a time, there is a significant tax planning opportunity. You will generally want to elect for the property with the larger appreciation in value to be your principal residence for the period it was owned. You would then be subject to capital gains tax on the other property for the years that it was not elected to be your principal residence.
- This is an important consideration in situations where a family unit owns a home and a cabin (or some other type of secondary property that is regularly inhabited).
If you own a second property as a rental property or purchased it to flip, you will not be able to claim the principal residence exemption on that property.

Sales of Properties Used to Generate Income

Properties that are owned for the purposes of renting or flipping will have an impact on your personal tax return when sold. If a rental property is sold for an amount greater than the carrying amount there will be an income inclusion for the recapture of previous Capital Cost Allowance (CCA) claims and potentially a capital gain. 50% of the capital gain would be taxed at your marginal tax rate. When a property is purchased with the intention of flipping it, this is generally regarded to be business income which means that you would pay tax at your marginal tax rate on 100% of the gain rather than the 50% applicable to capital gains.

Home Offices

Using your house as a home office generally does not result in a taxable event. However, you may be eligible to deduct a portion of your home expenses from your taxable income in certain situations.

GST on Property Sales

The sale of a previously inhabited residential property is generally exempt from GST. However, GST may apply to the sale of a previously inhabited residential property when the property is purchased and then substantially renovated for sale.

Change in Use of a Property

In some instances, there can be a real estate transaction without entering into a transaction to buy or sell the property. There are rules that can result in a “deemed disposition” of a property when the owner changes the use of the property. For example, if you sell the home you reside in and decide to move into a second home that you had previously used as a rental property, there is a deemed change in use from a rental property to a personal use property. This deemed disposition would normally be required to be reported on your personal tax return at the time that the change in use took place, at the fair market value of the property on that date. However, there is an election that can be filed to elect out of the deemed disposition, thus eliminating the requirement to report that disposition. However, this election is not available to you if you claimed CCA in any of the years that the rental property was owned. In this case, you would be required to report the disposition at the fair market value of the property.

Home Buyers’ Credit

There is a $5,000 tax credit available for first-time homebuyers, that can be claimed in the year a home is purchased if the criteria are met. This credit is applied at 15%, to reduce your taxes owing (or increase your refund) in the year the home is purchased. This credit is available to those who did not live in a home owned by themselves or their spouse or common-law partner in the previous five years.

Home Buyers’ Plan

The Home Buyers’ Plan allows for first-time homebuyers to access retirement savings as a tool to help with the down payment. This program allows for a home buyer to withdraw up to $35,000 from their RRSP without immediate tax consequences. This is a useful tool as it allows you to save more quickly through the deduction of contributions on your tax return and the fact that income earned in an RRSP is not immediately taxed. It is important to note that contributions must remain in the RRSP for at least 90 days before they can be withdrawn for these purposes. The amount must also be paid back through contributions to your RRSP over 15 years, commencing two taxation years after the withdrawal. If the repayments are not made in a year, the amount of the required repayment is included in your taxable income for that taxation year.

Conclusion

The tax treatment of real estate transactions can vary based on specific case facts. It is recommended that you consult with your accountant to ensure you are aware of the tax consequences of your specific transaction. About the Author Brandon Stetson, CPA, is a manager with SVS Group Chartered Professional Accountants LLP, assisting corporate and personal tax clients with their accounting, tax, and assurance needs. SVS Group is a full-service accounting firm in Edmonton, you can visit their website at http://www.svsgroup.ca/. Posted by Liv Real Estate on February 9th, 2021