What to Know About Tax Laws When Buying Second Homes

Posted by Edmonton Homes.ca on Thursday, July 19th, 2018 at 6:42am.

How Taxes on Vacation Homes WorkThe tax laws in Canada are going to put up a few hurdles for homeowners ready to sell their vacation or second home. From capital gains to depreciation, it's clear those with second homes bear a heavier burden than their primary homeowner counterparts. Before officially listing a Sherwood Park home, it helps to have any idea of what the taxes will be like before pulling the trigger.

For informational purposes only. Always consult with a financial advisor before proceeding with any real estate transaction.

Capital Gains of Second Homes

Capital gains or losses refer to the appreciation or depreciation of any given asset from the time it was purchased to the time it was sold. A home purchased for $50,000 and sold for $200,000 would have a capital gain of $150,000. The government collects taxes based on a portion of this amount in proportion to the seller's income. Most primary homeowners can deduct capital gains from their sale, but vacation homeowners will not enjoy the same privileges.

How to Calculate the Total

The Canadian government taxes at half the amount of the capital gains. When it comes to the official total, sellers add half their gains to their current yearly income. So in the case of the above example, the seller would add $75,000 to their income for that year. As sellers can imagine, a huge windfall can easily push them into the next tax bracket, meaning they could be paying 40% or more on their capital gains. (Income tax laws vary by province and person.)

Tips to Reduce Total Capital Gains Payment

Sellers are allowed to deduct costs associated with the purchase and sale (e.g., closing costs, etc.) as well as major home remodels. In the case of remodels, the total cost of the home improvements is added to the purchase price of the home, so the difference between purchase and sale price won't be nearly as drastic. So if the example seller completed $20,000 in repairs over the course of their lifetime, then the purchase price would be $70,000 and the capital gain would be $130,000.

Changing the Status of a Secondary Home to Primary Residence

Because primary and secondary homes are taxed differently, some vacation homeowners will move into their second home for a year and sell it as their primary home to avoid paying capital gains. This is a valuable option for individuals whose secondary residences has heavily increased in value. Once the homeowner has established their secondary home as a primary residence, they can then sell it and move to another home.

However, homeowners should research the legal requirements of establishing a home as a primary residence, as it requires planning and legal considerations. If the homeowners' primary home has plummeted in value, the vacation homeowner could sell both properties and deduct their capital losses from their capital gains (for a net zero effect.)

Donations and Contingencies For Capital Gains

Homeowners also have the option of donating their capital gains to a charity in order to receive a tax credit. The tax credit may not be enough to make the donation worth it, but homeowners should talk to a financial planner to clarify. If sellers know they're going to be in for a particularly long escrow period, they can also appeal to the Canadian Revenue Agency to grant an extension on the capital gains tax.

Sellers do have some options when it comes to reducing their capital gains tax, so it's important they realize this before declaring as part of the process to sell a home. But because the laws and paperwork can be complicated, it's always going to be best to talk to financial planner or real estate agent before making any major moves.

For informational purposes only. Always consult with a financial advisor before proceeding with any real estate transaction.

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