Selling a Rental Property
Selling a Rental Property: Tax Implications
Owning real estate can be a great way to generate additional income each month and add to your asset portfolio, but what happens when it comes time to sell? According to the Canadian Real Estate Association, the homebuying frenzy in Canada caused prices to rise near 10% in 2020 alone (Delmendo, GlobalPropertyGuide). Many property owners have taken full advantage of the uptick in the housing market, calling on the need to understand the tax implications you may face.
Understanding Your Income Subject to Taxes
Property sold for investment is subject to capital gain taxes. A capital gain is an increase in your investment over what you paid for it, otherwise known as your basis. This gain must be reported on your tax return and subject to capital gain taxes which can vary based on your individual tax rate. On the other side, a capital loss occurs when your basis in the property exceeds the selling price. This is less common given the current economic environment; however, it may occur. Your basis includes the price you originally paid for the property and any qualified improvements, such as upgrades.
Figuring the Taxable Amount
When it comes time to analyze your taxable amount, you need to determine if your gain or loss is realized or unrealized. A realized gain occurs when you sell the property while an unrealized gain occurs when your property increases in value, but you have not sold it. The capital gain tax will be assessed in the year you sold the property. The Government of Canada currently assesses a capital gains tax on 50% of the difference between the selling price and basis. For example, if you sell your rental property for $40,000 and you originally paid $20,000 for it, you would be taxed on $10,000. The income will then be taxed at your individual income tax rate, which can vary based on the other items on your return.
How Can I Minimize the Tax Implications?
There are a few different strategies to minimize the tax implications of selling your rental property. The first is to offset your capital gains with capital losses. The selling of other investments, such as stocks, can offset the capital gain you show from your rental property. Keep in mind that capital losses are generally limited to your capital gain amount, resulting in no reduction of taxable income. Another viable strategy is to consider your other income items. Since your rental property capital gain is taxed at your individual tax rate, you should look for tax saving strategies on the other items included in your return.
Understanding the taxes your rental property will be subject to is critical to employ effective tax planning strategies. Navigating the tax implications on your own opens the door to missed tax planning opportunities and overpaying on capital gains. One way to mitigate this risk is to contact the experts at Faber LLP, who can work alongside you to find innovative tax planning strategies and complete accurate filings of your capital gain tax.
Delmendo, Lalaine. “Canada’s red-hot housing market.” GlobalPropertyGuide, 28 January 2021, https://www.globalpropertyguide.com/North-America/Canada/Price-History. Accessed 17 April 2022.