When it comes to taxes, real estate ownership and sales can be complex. Here are some of the key tax implications to keep in mind:
Income tax
Rental income: If you own and rent out a property, the rental income you receive is considered taxable income. You can deduct certain expenses associated with the rental property, such as mortgage interest, property taxes, and maintenance costs. However, it is important to note that you can only deduct expenses that are reasonable and necessary.
Capital gains: When you sell a property, you may have to pay capital gains tax on the profit you make. Capital gains tax is calculated as 50% of the net capital gain, which is the difference between the sale price of the property and the adjusted cost base of the property. The adjusted cost base includes the purchase price of the property, plus any capital improvements that have been made to the property.
Exemptions
Principal residence exemption: The principal residence exemption allows you to exempt the capital gain on the sale of your principal residence from capital gains tax. To qualify for the principal residence exemption, you must have designated the property as your principal residence for all of the years that you owned it.
Change in use exemption: The change in use exemption allows you to exempt a portion of the capital gain on the sale of a property if the property was converted to a non-residential use before it was sold. The amount of the exemption is equal to the portion of the time that the property was used as a non-residential property.
Other tax implications
- Property taxes: Property taxes are assessed by municipalities and are based on the assessed value of your property. Property taxes are typically paid on an annual basis.
- Goods and services tax (GST): If you sell a property that is considered to be a “new housing unit,” you may have to pay GST on the sale price. A new housing unit is defined as a property that has never been inhabited or that has been substantially renovated.
- Provincial land transfer tax: When you purchase a property in Canada, you will have to pay a provincial land transfer tax. The amount of the tax varies depending on the province in which the property is located.
It is important to consult with a tax professional to get specific advice on your tax situation.
Here are some additional tips for managing your tax implications as a real estate investor:
- Keep good records: It is important to keep good records of all of your income and expenses related to your real estate investments. This will help you to prepare your tax returns accurately and to claim all of the deductions to which you are entitled.
- Plan ahead: By planning ahead, you can minimize the amount of tax that you must pay. For example, you may want to consider selling some of your properties in years when you have other capital losses to offset the capital gains.
- Seek professional advice: If you have any questions about your tax situation, it is always a good idea to consult with a tax professional. A tax professional can help you to understand the tax implications of your real estate investments and to develop a tax plan that is right for you.
- This article is for general informational purposes only and is not legal advice. Contact us today to discuss your specific situation.