How Do I Calculate Capital Gains Tax on the Sale of My Home?
If a person has owned a home for several years before selling, it's probably increased in value since the time of purchase. This means the homeowner had a capital gain—they turned a profit. Capital gains are taxable. In Canada, many home sellers are exempt from capital gains tax. However, if selling a second home, a rental property or a home where the owner ran a business, the seller may have to declare and pay taxes on at least part of their capital gain. Here's how to calculate capital gain on the sale of a home.
The Formula for Calculating Capital Gain
The basic formula is straightforward. Capital gain equals the proceeds of the sale minus the adjusted cost basis. However, there's more to this than just subtracting the old price of the home from the new one.
Proceeds of the Sale
The proceeds of the sale, or proceeds of disposition, are what the seller actually puts in their pocket once the sale is made. To calculate the proceeds, the seller starts with the price they sold the home for and subtracts the costs of selling the home. These include real estate commissions, legal fees, advertising costs, and any repairs needed to make the house salable.
Adjusted Cost Basis
Adjusted cost basis (ACB) is the amount the seller originally spent to buy the home and to improve it over the years. It starts with what the seller paid for the property, including any closing costs. These closing costs might include land transfer taxes, property survey fees, legal fees, and lawyer fees. Also, the seller may add in what they spent to make improvements. If they built a new room, installed an upgraded HVAC system, or even treated themselves to a hot tub, these expenditures are part of their ACB.
How Much Tax Must I Pay on My Capital Gains?
How much the seller pays, or, for that matter, whether the seller pays any at all, depends on their province and whether or not the home was their principal residence.
Capital Gains Inclusion Rate
In Canada, only half of any capital gain is taxable. The seller may exclude the other 50%. This applies not just to real estate but to other capital gains as well.
If the seller has a capital gain of $100,000, and they don't qualify for an exemption, then 50%, or $50,000, is added to their income for tax purposes.
The amount of tax they'll pay on that $50,000 depends on their province and tax bracket.
If the seller's a Canadian resident, they may be able to sell their home and avoid paying capital gains tax at all, but only if the home was their principal residence. Their principal residence is the place where they live most of the time. A household can have only one principal residence.
If the property was a rental property or housed a business, it's not a principal residence. If the seller lived in it some years and rented it out in others, they can claim the exemption only for the years they lived there. They'll have to pay tax on the part of the capital gain.
If the seller lived in part of the home but rented most of it, they may claim a pro-rated exemption. For example, if they lived in 30% of the building and rented 70%, they can exclude 30% of the capital gains from taxation.
If the seller rented out less than half the property, they might be able to claim the entire exemption.
Capital Gains & Capital Gains Tax
When you sell your home in Canada, your proceeds are the sale price minus sales expenses. Your ACB is what you originally paid, including buying expenses plus home improvement costs. The difference is capital gain, and you may owe tax on some of that gain if the home was not always your primary residence.