Do You Have to Pay Capital Gains Tax When Selling a Home?

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Let’s say you have been living in your only home for many years but now you want to move to a smaller place. You have built up quite a bit of equity so you are likely to receive a large profit when you sell. Will you have to pay capital gains tax on the money? Generally speaking, you do not need to pay capital gains tax when you sell your home because it likely falls under the “main residence exemption” to capital gains tax.
The home is strictly residential and not used to produce income.Specifically, you may not be liable for any capital gains tax when selling your home if the following conditions are satisfied:

  • The place has been your home for the entire period of ownership.
  • Your property satisfies certain conditions related to things like the size.

If you satisfy some but not all of the above conditions, you may be liable for some capital gains tax, but perhaps not the full amount that would normally be payable. Please consult your adviser for details. There are many situations where tricky capital gains tax questions can arise relating to the sale of a home. For example, suppose you are in the process of moving from one home to another and there is a period of time during which you own two homes at the same time. How do the rules then apply when you sell your first home? Your adviser can provide answers to such questions.

When considering whether you may be liable for capital gains tax when selling your home, here are some answers to commonly asked questions:

What is a “Place?”

The place or dwelling must be mainly residential. It can be a traditional home, cottage, apartment, unit in a retirement village, houseboat or a mobile home.

Is the Place Your Main Residence?

Although there is no single decisive factor here, things you should consider are the type of things that make a place “a home” in the ordinary sense. For example, some important considerations include:

  • Are your personal belongings in the home?
  • Do you have utility services (telephone, gas or electricity) connected to the address?
  • Is your mail delivered to the address?
  • Is this your address on the electoral roll?

There are many other factors to consider that vary depending on individual circumstances. Ask your tax adviser what factors might work to your advantage.

What Is Your Ownership Period?

As mentioned above, the place must be your home for the whole time you own it in order to be fully exempt from capital gains tax. This is referred to as the ownership period. It generally starts on the date you get legal ownership under a contract and ends on the date of sale under a contract.

But there can be certain complications to this rule. For example, if after you buy a home, you cannot move in straight away for some reason. You generally may have to wait until you move in to claim the place as your home for capital gains tax purposes. Consult your adviser for your specific situation.

What if I Want to Build a Place on Land I Own?

There are also specific rules if you build a place on land you already own. Generally, land by itself may not be considered a main residence. Only after you finish building a place and it becomes your home, can you claim the capital gains tax exemption when you sell. However, there are certain circumstances where you can treat land as your main residence.

Further advice

The above is a discussion only, and further advice should be obtained before implementing a new strategy. Please contact our office to discuss your circumstances and to obtain tailored advice.

Article as seen at http://checkpointmarketing.thomsonreuters.com/