How to Calculate Tax Payable on the Sale of Your Rental Properties?
Hi fellow Canadian Real Estate Investors,
It was my birthday weekend last week.
Erwin arranged a surprised celebration party on Sunday with my best friends.
He knows that I’m a geek so we once again went to an escape room. This time we manage to escape in less than 35 minutes and that was the fastest time I had ever done!
We even made the best escape time for the week! Woo-hooh!
Now onto this week’s topic.
The Tax Man is often the most ignored partner in our business.
He usually gets a big chunk of our return.
For those of you who are considering selling their principal residence, you can be reassured that you likely won’t have to pay any tax on your home provided that you meet certain conditions.
For those of you who are considering selling one of their investment properties, the tax implication can be a bit more complicated.
There are two steams of income you would need to pay tax on: (1) capital gain and (2) recapture.
Capital gain
This is an easy one. Let’s use an example to illustrate.
Say you purchase a property for $250,000, and you sell it for $350,000 and assuming the property is buy and hold.
Capital gain = $350,000 – $250,000 = $100,000.
In Canada, only 50% of capital gain is taxable, hence 50% of $100,000 is taxable = $50,000.
If you own the property in your own personal name, this $50,000 is added on top of your other income and is subject to the marginal tax rate for the respective tax brackets you are in.
For simplicity’s sake, we use the HIGHEST marginal tax rate in Ontario in our calculation – 53.53%, round it down to 50%.
Hence tax liability is roughly $50,000 x 50% = $25,000.
Keep in mind that if you make less than $220,000 personally BEFORE you add in this $50,000, you will be subject to lower tax.
$25,000 is MAXIMUM you would have to pay on the capital gain.
If you own the property in your corporation, the numbers would pretty much the same. 50% is taxable but the taxable portion is considered passive income.
Passive income is taxed at slightly over 50%. Hence, you do the same calculation as above. Take $100,000 x ½ (50% taxable) x 50% (rough tax rate on passive income) = $25,000.
Next time when you are trying to estimate the amount of taxes you would owe when you sell a property, simply take the gain and multiply it by 25%. This will give you a really good idea of how much you would have to pay.
Recapture
As a taxpayer, you are allowed to claim the wear and tear on the property to defer your rental income.
The wear and tear is called capital cost allowance.
Use the same example as above, you purchased a property for $250,000.
Assume that 90% of the value belongs to the building and 10% of the value belongs to the land, capital cost of the building is therefore 90% x $250,000 = $225,000.
You can then claim $225,000 x 4% against your net rental income every year to defer the tax. The amount of claim is capped by the amount of net rental income you make from your portfolio.
In a previous blog posts that I wrote last year, I discussed whether you should use capital cost allowance to defer your rental income before. Feel free to check this out.
What’s the catch then?
You will have to take all the deductions you claimed throughout the years into income the year you sell your rental property!
For those of you who are unfamiliar with the concept, concept of capital cost allowance is similar to that of RRSP. You deduct the contribution you make against your income but you will have to report them in your income the year you take it out.
Say year 1 you had $5,000 net income after deducting all the qualified expenses against the rental income. You can take the lower of:
- $225,000 x 4% x ½ (first year only ½ is deductible) = $4,500
- $5,000
In this case, you can choose to deduct $4,500. But this also means that the year you sell it you will have to take this $4,500 into your income.
Now year 2 you had the same net income of $5,000. You can again take the lower of:
- You can only take 4% on the undepreciated amount ($225,000 – $4,500) x 4% = $8,820
- $5,000
In year 2, you will take $5,000 of capital cost allowance.
Say year 3, you decide to sell and it was sold for $350,000.
On top of the capital gain tax that you would have to pay, you are also required to take all the capital cost allowance into income.
In our example, you’ve taken $4,500 in year 1 and $5,000 in year 2, total of $9,500.
You will have to take $9,500 into income.
Similar to the calculation of capital gain tax above, we use the highest marginal tax rate of 50% to estimate the tax.
Therefore, tax payable on recapture is 50% x $9,500 = $4,750.
Total tax liability = capital gain tax + recapture tax = $25,000 + $4,750 = $29,750.
Are there ways to reduce these tax liability?
Absolutely!
Recapture tax can be reduced by using capital cost allowance of another property against the property being sold.
If you don’t have a second one, you can consider buying another property in the same calendar year.
Capital gain taxes can be reduced by any capital assets that you own that already have unrealized capital losses, such as, loss on any stock or mutual funds in any unregistered accounts.
Until next time, happy Canadian Real Estate Investing and enjoy the heat.
Cherry Chan, CPA, CA
Your real estate accountant
Thanks,if i never claimed capital cost allowance, do i still need to pay recapture tax?
If you have never claimed any capital cost allowance you do not need to pay an recapture tax.
In the example you used the capital gain was $100,000. What if I developed basement, made repairs to drainage system, bought furniture and appliances for the rental home etc etc. Would these costs not be expenses deductible against capital gain. What kind I be required to have at hand.
If you made repairs to drainage system and they were truly repairs, expenses should be considered a write off against rental income. On the other hand, if the expenses were incurred to improve the property, these expenses would be added to the cost of the building, and you can claim them against the future sale price (and also claim capital cost allowance on these expenses).
For all the expenses, you are required to keep all the receipts incurred.
Some one buy home plot for 2,00,000 now selling it 9,00,000 profit is 7,00,000. Now how much he is liable to pay as tax to BC govt.
Rakesh, it’s a complicated question. If you buy the house with the intention to flip, you are liable for tax on $700K. Depending on the ownership structure, you can pay as low as 15% and as high as 50%.
If the intention is to buy the house for long term investment and earning rental income, you can use the capital gain calculation done in this blog post for your tax estimate.
If you purchased the home and have lived there as your primary residence, your tax balance can be nil.
So depending on your situation and make sure you consult with a professional accountant for your particular situation for the proper advice.
You state that recapture tax can be avoided by using the UCC of another property or by buying another property in the same year. This deals with the concept of pooling assets in one class. However, I’ve been told by a tax person that rental properties in excess of 50k have to be put in separate classes and that when a property is sold, tax has to be paid on any recapture, even though the taxpayer owns other properties with UCC balances or replaces the asset in the same calendar year. What is the correct answer?
Hi Colleen, rental income is viewed on a portfolio basis and hence CCA taken on one property can be used to offset against rental income incurred on another property. Recapture is viewed as rental income and CCA on a new property can then be used to reduce the rental income (partly created by recapture) and provide further deferral.
Hopefully this helps.
My mother is selling a residential rental property in Nova Scotia does HST have to be paid?
Generally speaking residential rental property resale is not subject to HST. I would still check with a qualified accountant with your specific situation though.
How does “alternative minimum tax ” work. If I sell a rental property I paid 250,000.00 for 1,500,000.00 in BC do I deduct 250,000.00 from 1,500,000.00 for 1,250,000.00 capital gain. Then pay tax on 625,000.00 at 50% for a tax bill of 312,500.00. I would then add this to my income of net 63,000.00 for total of 375,500.00.
Are these figures somewhat correct as I was told ” alternative minimum tax ” may boost my tax rate up to around 65% which frankly scares me.
What happens with capital gains if you sell a current rental and upgraded to a more expensive rental. For example, selling a 500000 rental to purchase 960000 rental. Is there capital gain in this situation? Or not for an upgrade
Canadian tax law does not allow deferral of capital gain, unless you are using the property for the purpose of running your small business.
Hi Cherry, a question for you. My wife and I paid $125,000 for our primary residence years ago. Today, it value is about $350,000. We are considering moving and renting it out. Suppose we sell it 3-5 years out and the value has not increases at all. My guess is we would not have any capital gain to report, if we hired a qualified appraiser at the time of rental to verify the entire gain in value was when we occupied it. Is that correct?
Hello Cherry
I have a 2nd house that I purchased for my parents to live in, no rental income
Currently my dad is now too old to climb the steps and we are thinking to sell and buy a condo for them.
What are my tax implications to enact this plan.
Cheers
Winston
Winston, if the house is owned by you, capital gain would have to be reported without digging too much into details. It’s better to schedule a consultation and you can respond to our blog post to go through your situation.
Cherry
I have a house I rent out but have no other property. I live with my father is the house considered a rental or principle property I have heard both
Number 1 criteria to claim primary residence is that you have to live in the property.
If you don’t live in the property, you are not allowed to claim the property as your primary residence.
If you live in the property for a period of time, you can potentially designate the property as your primary residence, or even four more years. Depending on your situation. I would highly recommend you to consult someone who know real estate tax to give you advice.
Hi, great blog post! I had a question about selling a rental property at a loss. If I purchased a place for $500K, and then sold it for $425K, I have a loss of $75K. Am I able to claim the loss against my income for tax savings? Thank you!
Generally speaking, a rental property is considered capital property and capital losses cannot be used to offset against regular income.
You can however, use it to offset against future capital gain you make. Capital losses can be carried forward indefinitely.
Hi Cherry,
What if you claimed the loss as a Terminal Loss? Could you then offset your other income streams?
Thank you,
Bill
Terminal loss only arise if your sale price is greater than the undepreciated capital cost. I don’t think you can choose to claim the capital loss as terminal loss.
Hi Cherry, Great blog, thank you for the great info!
With respect to terminal loss, should it not be Terminal loss can only arise when the sale price (Proceeds of Disposition) is less than the UCC.
What happens if I remortgaged the property at one point? I bought for $250,000 16 years ago. Mortgage is 269,000 and it’s worth $420,000. How does one calculate capital gains?
Capital gain is usually calculated at the time of sale.
Slightly different question. When the owner passes away, is the remaining mortgage on the rental unit deducted from the capital gains?
No. Adjusted cost base is used to calculate capital gain.
Hi Cherry,
Thanks for the great website and valuable information. I would like to ask you I currently own an investment property and It is not a rental property. I have not generated any rental income. I bought the property to renovate and sell. I have owned it for just over a year and have upgraded it for the purpose of flipping it for a profit this year. I had purchased the condo for $322K, and I anticipate selling it for $400K. Assuming I make a gross profit of $78K..What deductions can I claim specifically?..I’m aware that I pay a 50% capital gain on my net profit. I understand I can claim my land tax, condo fees, mortgage interest,closing costs,utilities, insurance, legal fees, real estate commissions, renovation upgrades. Is there anything else I can deduct that would increase the adjusted cost base in order for me to pay less as a capital gain?
I appreciate any insight and advice you can share 🙂
Thank you Marc
From your description, this sounds like business income. You should really talk to a professional advisor to make sure you are filing your tax properly.
Business income is 100% taxable.
hi i bought a income property under a numbered company.i bought it for 800k sold it for 2.9 mil. 50% paid at closing. 50% in 5 years
so do i pay tax on 50%now and 50% taxes in 5 years
Hi Ray, there are deferral opportunity definitely. It is determined on a case by case basis. Be sure to consult a professional accountant to recognize the tax impact.
Cherry
Hi Cherry. My mother inherited a house from my grandmother, my mother passed away this year 2017 and we need to have the house transferred into my fathers name whereas his name was never on title. The property was transferred into my mothers name in June of 2009 and has always been a rental property since transfer. This is a second property whereas they also maintained their principal residence. The only major renovations\expenses that incurred was in 2009-2010 when it was redone for the renters. My questions are; how are the capital gains calculated upon transfer to my fathers name and should we strongly consider digging up receipts for the last eight years for a recapture as you have explained?
Transfer between spouses at death can be done on a tax free basis. I would still consult a professional accountant for proper advice.
Hi Cherry,
Great post. I had a quick question on calculating capital gains tax on the sale of a rental property. If I bought for $250k and sell for $400k would I pay the tax on 50% profit of the $150k difference (i.e. $75k) or would the profit be calculated on the difference post land transfer, legals, closing costs etc. Also, if the rental property is in both mine and my wife’s name, I assume the profit is split and the capital gains tax is calculated according to each of our marginal tax rates. Is this correct?
Thank you.
All expenses incurred that are related directly to the sale can be deducted against the sale price. In my example, we often ignore these closing costs to simplify the example.
You’re right that only 50% is taxable, if your property is a capital property.
In terms of ownership between you and your wife, it goes to how you have been reporting it and who truly owns the property.
Good luck!
Hi Cherry,
what about expenses that occur when purchasing a property. Can those be deducted from the sale price (or to increase the purchase price) and reduce the capital gain? I bought an apartment and had around $30000 in legal fees, lender fees (had to use private lender and then traditional bank institution) and insterest, land transfer tax and similar… Those expenses were not used to reduce rental income in the year apartment was purchased and the following year rental income was only $21,000.
Thank you,
Tina
Hi,
In the example where husband and wife owned property, we have been reporting 50%. So now after sale should we split all the numbers 50% in schedule 3? Thanks
Hi Cherry, I came across this blog while surfing for information on selling a rental property and was sure glad I did. I was told that if you have a rental property and stop renting and move into it and live there for 5 years and then sell that you won’t have to pay any taxes on the property. Are you able to confirm if this is true? I’m thinking of retiring in a few years, selling my residential property in Ontario then giving the tenants notice to move out of my rental property in NL and moving there myself for 5 years and then selling. Can I avoid paying taxes on the property if I do that? Please advise. Thanks in advance.
Hi Nancy, primary residence exemption is a yearly designation. You can only designate the property as your primary residence at any given year.
If you live in your Nova Scotia rental property in the five years, you can designate those five years as your primary residence, so no tax would be incurred on that five years.
But for the years that you rent it out, you will still have to pay tax on it.
There are some exemption and option available. Be sure to consult your accountant before making your move. It’s a big move, from Ontario to Nova Scotia.
Have a great weekend!
Hi Cherry,
Do you happen to have a source for the $25000 maximum for capital gains when personal income is less than $220000? I can’t seem to find this info anywhere else. Thanks!
I am not aware of such a thing existed.
Maybe I’m misunderstanding something… could you please explain this from the text above:
“Keep in mind that if you make less than $220,000 personally BEFORE you add in this $50,000, you will be subject to lower tax.
$25,000 is MAXIMUM you would have to pay on the capital gain.”
joint rental property deemed sold upon death of one of the owners. Since the diseased person never got the funds but will owe taxes because of the deemed income is there a way for the business to pay the tax and use it as a write off.
Tax is not a write off, assuming I understand your questions properly.
When an owner passes away, there is a deemed disposition at fair market value. There are specific rollover sections that could apply for the spouse to inherit the property but I again encourage you to seek professional advice.
Hi
My wife and i bought a condo in Florida in 2008 for 170 000 $CAD, used it until 2012 and then rented it out because the market had fallen and we wold have taken a big loss selling it at that time. Its value in 2012 was approx 125 000$CAD. We finally sold it in January 2017 for 141 000$CAD, taking a 29 000$CAD loss from the original purchase price. We never took depreciation over the 4 year rental period. The US tax consultant told us that we neither had a loss nor a gain in this sale, so no capital gain.
What about when I file my taxes in Canada, does the same apply?
Thanks
Hi William, unfortunately I can’t provide a straight answer. A few questions come to mind and I encourage you to speak to a professional accountant to make sure you are only pay appropriate fair of tax.
One thing comes in mind is primary residence exemption, conversion rate, etc. I won’t have an answer for your question unless we do your personal tax return and look at all the numbers.
Thank you for all the information. One question…is the real estate commission paid considered a closing cost and one that can be deducted in order to calculate capital gains?
Yes the commission was $6300.00US and can be used to calculate the capital gain. Its usually added to the ACB,
Thanks
With the exchange, the commission comes to $7875.00 CAD for the rate at the time we sold,
Thanks
William and Julie, commission can be deducted against your proceeds.
If I own three properties that are held in a corporation and we wish to move into one for a period of about 5-7 years. Would we be better off to take only the ONE property out of the corporation at this time? Meaning would I have to pay capital gains twice if I took all three into our private name then later sold them?
Example. 700,000 in prop. 117000 purchase price. No capital cost allowance taken over 15 years of ownership. Value 1st prop 400,000 second 125,000, third 140,000.
What is the better route tax wise? Sell all three to private name? our intention is to use the income from the properties as retirement income. As such I assume any profits will be taxed at the corporate rate then taxed again at the personal rate? What should we do? Take all out at once pay the hit then just pay the private taxation on the remaining rental properties?
Kate, I think this is best done via a private consultation. You can respond to this email or email my assistant at admin@cccpa.ca
Hi Mr Chan
my wife and I became Non resident Canadians in Dec 2014 and rented out our one and only primary residence (bought in Nov 2007) in the same month. We would now like to sell our residence. would I be liable for capital gain tax and how should I calculate my capital gain.
Many thanks
Yes you will be liable for capital gain tax.
Thank you for your prompt reply. Would the Capital gain be calculated based on the the current value LESS the value of the property on the day I became a non resident (Dec 2014)
or
The current value LESS the value at purchased the property at (Nov 2007).
Thank you once again
Deemed disposition happened at the time when you became non-resident.
Dear Cherry,
I have the same question, If primary residence property was rented out for 1 year, is capital gain calculated based on gain during that year?
Thank you
Non-resident is very different. Your situation is also different from his.
When it involves primary residence, it can get a lot more complicated fairly quickly. Without getting the full picture, I can only say that you may or may not be liable for the gain.
You can also find out more by searching primary residence on our website.
Hi Cherry,
We bought a house in Ontario in 2006, and it was our primary residence until 2015. Then we moved and rented out the house. In 2017 we sold it. How can we calculate the capital gain? It seems the rule is that the tax applies to the increase from 2015 to 2017, but we do not know the price of the house in 2015. How can we calculate the capital gain in the way it is acceptable to the taxman?
We usually advise our clients on how the capital gain is calculated and do an analysis to see if there’s any opportunity to shelter additional capital gain. You can schedule a consultation through our office.
Hello Cherry. My wife and I bought a home in BC approx 20 years ago as a primary residence ($210,000.) We purchased a second home approx 5 years ago, and that became our primary residence. We have rented out the first home for the last 5 years and plan to sell for approx $450,000. Is our Capital Gain $240,000 or closer to $40,000 (based on primary residence for 15 years?)
Hi Paul, I can’t give specific advice but technically speaking you can assign the first 15 years of your first home as the primary residence. When you sell, you will be liable for the 5 years of gain that you weren’t living in the property. Hope this helps.
Fantastic, thanks Cherry, that does help.
Hi Cherry
is there any additional selling tax for foreign status in BC? I paid 15% of foreign property tax when I bought my first home. And I want to sell my home but I couldn’t make a decision because of this.
Thanks
I assume you are a non-resident. A non-resident would also be liable for taxes when selling an investment property and/or selling primary residence. It’s best to consult a professional accountant on your particular issue.
I am using the Turbo Tax to file my tax return. I sold my rental property this year and have the gain $120000 in net. Should I just put $60000 as the total capital gain or need to claim the 50% from one of the forms?
Hi David, unfortunately, I don’t use Turbotax and am unable to provide any support on Turbotax. I do encourage you to call them directly though.
Cherry
Hi Cherry,
I’m wondering if you could provide some guidance. My boyfriend and I had bought at house together in 2012 and rented out our basement (approx 40% of the home) to my father. House was purchased for 220 000. We sold our house in 2017 for 420 000 and each bought separate properties using capital gains. My boyfriend bought another property to rent, and he was the one claiming the income yearly, but getting that income reduced via claiming of bills/maintenance. Is it possible to use the down payments towards our new homes to reduce our capital gains, or defer tax (for him)?
Downpayment of new homes cannot be used to reduce capital gains unfortunately.
If you live in the property, you may qualify to claim primary residence exemption (subject to a bunch of criteria), be sure to consult a professional.
Thank you. Your example helped me greatly. Until reading it I was under the mistaken impression that a capital recapture was just a portion of the capital gains and therefore that only 50% of it would be taxed. For that reason, I couldn’t understand why my tax software was not reducing the amount of the recaptured capital cost by 50%.
Thankfully, I was just testing out different scenarios on my software.
I just bought a rental unit and was trying to decide whether or not to claim a capital cost allowance. Now I understand the wisdom of not doing so. Thanks again for your help.
That’s fantastic! Love that feedback!
Hi Cherry,
First of all, great blog – so helpful. I do have a few follow-up questions to what you have here. If a rental property was sold at an amount less than or equal to what was paid initially at the time the house was purchased, would capital gain be applicable in this case? If so, how would the capital gain be calculated – FMV? or otherwise?
Thank you!
If rental property is sold to an arms length party, then you would incur a capital loss.
You may still be liable for tax on recapture though. Be sure to check back with your accountant to calculate everything accordingly.
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Lots of great information here. I am trying to understand capital losses.
I bout a rental property 10 years ago for 380,000 now I want to sell it but still owe 310,000 on it but could only sell it for about 260,000. Will I be able to claim a capital loss?
Thanks
Yes you will be able to claim capital loss. But capital losses can only be claimed against future capital gain, not regular income.
You may be able to claim some terminal loss as well.
You will still owe your $50K of difference to the bank ($310K to $260K sale price)
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hi, regarding your calculation of capital gains on a rental property • Assume that 90% of the value belongs to the building and 10% of the value belongs to the land, capital cost of the building is therefore 90% x $250,000 = $225,000. If I sold the building for $500,000 would the capital gain be calculated on the sale price less the land portion in this case $500,000 less 10% land portion for a building portion of $450,000 minus purchase price of $225.000 which equals $225,000 of which 50% would be capital gain of $112,500 on the building. According to CRA brochure Capital Cost does not include the price of the land. Let me know thanks Tom
Not really sure what you are asking for but,
Technically speaking, the allocation is based on fair market value. So allocation of your cost to building would be based on fair market value. Allocation of sales proceeds would also be based on fair market value between building and land.
You cannot take capital cost allowance off land. That’s correct.
HI Cherry,
Very informative blog post.
Lets say I lived in a Condo (Principal Residence) for 10 years. After 10 years, I purchased another home and moved in and designated the new property as the Principal Residence. However, I kept and converted the my condo to a rental property. After 2 years, I sold the condo. How would the Capital Gains be taxed as such because it was for 10 years the Principal Residence before becoming rental property? No Capital Cost Allowance was ever claimed for the 2 years.
Mike
You will have to pay two years of capital gain.
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My husband and I had a rental house that while used as a rental gained $100k in value. We separated and he moved back in to the home. Two years later, he bought me out of the home and still uses it as him primary residence. My accountant says we both need to still claim the $50,000 each and pay capital gains tax on the $25,000. If my husband moved back in and lived there for over two years as owner occupied and still is owner occupied, is that actually true?
Hi Jeanne, with the limited information here, I will try my best to discuss in generic terms.
Primary residence exemption is an annual designation. When your husband lives in the property, he can designate that property as primary residence for two years. When he sells, he still owes taxes for the years that he used the property as rental.
As for you, since you never lived there before, and you separated from him, your share of the capital gain would be 100% taxable.
Are real estate agent fees tax deductible?
Are Real Estate feed tax deductible when selling a rental property?
Yes it is deductible.