Will I Have Capital Gains When Downsizing My Home?

You have enough to think about when selling your home to move on to your next chapter, and taxes should never have to weigh on your mind. They are one of the only certainties in life, however. At times, there is no getting around them.

Capital gains are one of the most common concerns when selling a property. At the dollar amounts involved with Etobicoke real estate, even a small percentage can have a major impact on your plans. Today, we’ll review capital gains, when they apply, and any exceptions that may work in your favour.

Disclaimer: Remember that we are real estate agents, not tax accountants or lawyers. Please consider this post for informational purposes only and consult an appropriate professional for personal advice.

Did you know that helping seniors move is one of our specialized services? Whatever your situation, we are here to help streamline your entire transition.

What Are Capital Gains?

Capital gains are a tax you pay upon disposing of any asset you own that appreciates in value. It could be stocks, bonds, a business (but not the daily inventory), jewellery, artwork, a coin collection, or even a rare antique that has been in your family for years.

Few things offer more potential for gain than real estate, so the government is especially interested in any properties you own.

If you sell an asset, it triggers either a capital loss if the price is less than what you originally paid or capital gains if you earn a profit. If there is a gain, a percentage of the increase gets added to your tax return for the year.

Capital losses are more complex. You can claim them, but only against capital gains. It doesn’t help you reduce your taxes on employment or business income.

Homeowners can sometimes find themselves in a much higher bracket than they anticipated. That’s why it’s critical to educate yourself and not be caught off guard.

Taxes or no taxes, earning the highest amount when selling your home will put you in a better financial position. The posts below are full of timeless, effective advice.

The Impact of Capital Gains When Downsizing Your Home

If you only own one property, and it’s the house you live in, capital gains won’t likely affect you, thanks to the principal residence exemption. This exemption can be a big relief for those who purchased Toronto property many years ago before prices began to soar. You can sell your home with peace of mind, then choose something smaller or even rent instead without worrying about taxes.

The situation is different when you own multiple titles, such as a vacation home or rental property. These are subject to capital gains once ownership changes hands. There are different implications for various circumstances.

In one case, you might sell your primary residence and move into your vacation home. You’re safe for now, but selling your second property later will trigger capital gains for all of the years that it was not your principal residence.

Another scenario might be where you sell all of your existing properties and buy or rent an apartment or condo. In this case, all transactions trigger capital gains with the exception of your primary residence.

How Much Are Capital Gains Tax In Ontario?

You can calculate and report any capital gains or losses by using the forms right off the Canada website. The formula is simple: Subtract your selling price from the original purchase price. If there’s a gain, add 50% to your tax return for the year.

Note: Profits on flipped property are considered business income and are in a category of their own. If you’ve purchased a property to renovate and then resell within 12 months, be sure to use the correct form.

Looking for simple, practical downsizing tips? The posts below will help:

Is There a Way to Avoid Capital Gains Tax in Canada?

Trying to avoid taxes is one of our favourite hobbies as Canadians, right up there with skiing and hockey! Unfortunately, there aren’t many tools to reduce the burden.

Some families will try to be creative by using trusts, selling the property at a nominal amount or even gifting it altogether to a family member. Each of these comes with a set of implications you’ll need to understand first.

Even when no money changes hands, there could still be capital gains unless you can claim the principal residence exception. The government always views the transfer of ownership as a sale or purchase at fair market value and will tax it accordingly.

There are circumstances where you could potentially defer payments, perhaps through an RRSP or by using vendor takeback financing. Either of those options is beyond the scope of this post, and tax laws can change periodically.

As always, check with an accountant to be sure of the legalities and to protect the interests of all parties. However you decide to proceed, professional guidance will allow you to make empowered decisions when downsizing!

Are you in the planning stages of downsizing your house and you want access to the most up-to-date resources? Our Etobicoke real estate agents are here for anything you need. Reach out today at 647-282-7653 or email contact@sileckythompson.com with any questions or to get started.