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Capital Gains Tax on Real Estate

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  • Jun 27th, 2005 2:09 pm
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[OP]
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Capital Gains Tax on Real Estate

Any capital gains experts? Here's the scenario:

I bought a pre-construction home (ie. sign the papers, place the deposit etc) but don't officially get possession until January 2006. This will be my principal residence (currently renting an apartment until it's built).

If I bought another residence and then sold the pre-contruction home immediately after taking possession, would my sale on the pre-contruction home be subject to capital gains tax, because I bought another home prior to January 2006.

A variation on the above, could I buy and flip a home all before I take possession of my January 2006 home free and clear without worry of capital gains tax?
:idea:
"Our doubts are traitors, And make us lose the good we oft might win By fearing to attempt."
William Shakespeare Measure for Measure

"You have to go in with a winning attitude. It doesn't mean you'll win, but you'll lose a lot less" - Brad Lamb ("Toronto's Condo King")
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At any one point of time you can only have one principal residence.

If you bought another residence as your principal residence, the gain on pre-construction home would be treated as capital gain.
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slothy@cutey wrote:Any capital gains experts? Here's the scenario:

I bought a pre-construction home (ie. sign the papers, place the deposit etc) but don't officially get possession until January 2006. This will be my principal residence (currently renting an apartment until it's built).

If I bought another residence and then sold the pre-contruction home immediately after taking possession, would my sale on the pre-contruction home be subject to capital gains tax, because I bought another home prior to January 2006.

A variation on the above, could I buy and flip a home all before I take possession of my January 2006 home free and clear without worry of capital gains tax?
In order to calculate this, I need more information. When did you buy your previous residence? How much did you buy it for? And when is your intention of selling it and for how much. You also need to calculate how much is your capital gain in each year.

In terms of tax planning, you can choose which place you would like to be considered your principle residence. However bare in mind you can have only one principal residence at the same time. Now assuming your pre-construction home will earn the greatest capital gains than your other residence, you should choose the pre-construction home as your principal residence until of course you sell it.

In other words, you will pay capital gains only on the time you owned two properties at the same time which overlapped. In that case, you should designate the most expensive hosue as your principal residence and then you pay capital gains on the other.

For more information, refer to your income tax act S. 40 (2) b,c, (6) and also S.54 which contains something, but i forgot what it was....its been a while since i took my personal tax course.
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slothy@cutey wrote:Any capital gains experts? Here's the scenario:

I bought a pre-construction home (ie. sign the papers, place the deposit etc) but don't officially get possession until January 2006. This will be my principal residence (currently renting an apartment until it's built).

If I bought another residence and then sold the pre-contruction home immediately after taking possession, would my sale on the pre-contruction home be subject to capital gains tax, because I bought another home prior to January 2006.

A variation on the above, could I buy and flip a home all before I take possession of my January 2006 home free and clear without worry of capital gains tax?
A few thoughts:

For a property to be considered your principal residence, it must be considered a capital property to you and must be occupied by you at some time as your residence. A property you purchase and just flip after taking possession for a short while is arguably not a capital property, even if you live in it for a while.

A property you commit to purchase which you intend to occupy as your residence, however, would likely be considered a capital property, unless you have previously flipped real estate, or have some fall-back plan to sell the property in a short while.

If you are flipping real estate (particularly your last scenario) it's going to be hard to convince the Canada Revenue Agency that you are eligible for capital gains treatment, never mind principal residence. As such you have to pay tax on 100% of your profit (less deductions for reasonable expenses) and if you never occupy a newly constructed residential unit you may be liable to collect GST on the flip.

The principal residence designation is applied on a per year of ownership basis. Though you can only designate one property per calendar year as your prinicipal residence, it is still possible to own two properties in the year and obtain fully tax free capital gains on each due to the one free year of designation allowed in the principal residence exemption formula. This is necessary because in the year of selling one residence and moving into a newly acquired residence one will obviously own two residences during the year, possibly with overlapping periods of ownership.
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Thanks for all the information.

I purchased the brand new construction home with the intention to live in it as a principal residence. My intent was never to flip it. However, given that it's a while before I live in it, is it considered a principle residence now or when I officially close on the house (ie. say in January '06). I haven't arranged financing yet on the new home, all I did was place a deposit on it. The home builder/developer still owns the home until I take possession. Therefore, would I be correct in assuming if I bought a house, lived in it for a period of time (as it would be my main residence at THIS time - ie. I would move out of my rental), then flipped the house I purchased all before January 2006, I would be exempt from capital gains tax?
:idea:
"Our doubts are traitors, And make us lose the good we oft might win By fearing to attempt."
William Shakespeare Measure for Measure

"You have to go in with a winning attitude. It doesn't mean you'll win, but you'll lose a lot less" - Brad Lamb ("Toronto's Condo King")
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slothy@cutey wrote:Thanks for all the information.

I purchased the brand new construction home with the intention to live in it as a principal residence. My intent was never to flip it. However, given that it's a while before I live in it, is it considered a principle residence now or when I officially close on the house (ie. say in January '06). I haven't arranged financing yet on the new home, all I did was place a deposit on it. The home builder/developer still owns the home until I take possession. Therefore, would I be correct in assuming if I bought a house, lived in it for a period of time (as it would be my main residence at THIS time - ie. I would move out of my rental), then flipped the house I purchased all before January 2006, I would be exempt from capital gains tax?
Well I would try not use the term "flipped" in your discussions. That alone suggests you are trying to profit from your activities. Instead try to use a term like "resell".

You don't have to worry about the status of the new home you put a deposit on until you actually acquire ownership. That would be January 2006, or perhaps some later date.

In the interim period (before your move into the newly constructed home) if you buy a house to live in, it could be considered your principal residence and should be free from tax on resale.

I'm not quite sure what you intend to do with the new home. For it to be considered your principal residence you actually have to own it and live in it for some time. So you would have to move in in January 2006. If that happens then it would qualify to be exempt from capital gains tax. As noted above that's the time you would have to start addressing the status of the newly constructed home, not before.

If, on the other hand, you never occupy the newly constructed home but merely resell after taking ownership, it could not be considered your principle residence and any gain would be subject to tax, either as a capital gain (taxed at your marginal tax rate applied to 50% of the gain) or as an "adventure in the nature of trade" (taxed at your marginal tax rate applied to 100% of the gain).
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taxguru wrote:Well I would try not use the term "flipped" in your discussions. That alone suggests you are trying to profit from your activities. Instead try to use a term like "resell".

You don't have to worry about the status of the condominium unit you put at deposit on until you actually acquire ownership and it registered as a condominium unit. That would be January 2006, or perhaps some later date. With condominiums you usually occupy the unit for a period before it is actually registered as condminium unit and you pay a form of rent during theis period.

In the interim period (before your move into the condominium) if you buy a house to live in, it could be considered your principal residence and should be free from tax on resale.

I'm not quite sure what you intend to do with the condominium unit. For it to be considered your principal residence you actually have to own it and live in it for some time. So you would have to move in in January 2006. If that happens then it would qualify to be exempt from capital gains tax. As noted above that's the time you would have to start addressing the status of the unit, not before.

If, on the other hand, you never occupy the condominium but merely resell after taking ownership, it could not be considered your principle residence and any gain would be subject to tax, either as a capital gain (taxed at your marginal tax rate applied to 50% of the gain) or as an "adventure in the nature of trade" (taxed at your marginal tax rate applied to 100% of the gain).
Thanks. That's what I figured. Then new home (Jan '06) is actually a home - not a condo. But the principle applies. Indeed, you're right about terminology. I think of "flipping" as a spontaneous action term and not really pre-meditated. It is better to say "resell". Obviously I would "live" in the new home when it's ready, and have a phone number set up plus divert mail there for the time it takes to resell the home. For all purposes it will be primary at that time.

Thanks for all the information!
:idea:
"Our doubts are traitors, And make us lose the good we oft might win By fearing to attempt."
William Shakespeare Measure for Measure

"You have to go in with a winning attitude. It doesn't mean you'll win, but you'll lose a lot less" - Brad Lamb ("Toronto's Condo King")
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slothy@cutey wrote:Thanks. That's what I figured. Then new home (Jan '06) is actually a home - not a condo. But the principle applies. Indeed, you're right about terminology. I think of "flipping" as a spontaneous action term and not really pre-meditated. It is better to say "resell". Obviously I would "live" in the new home when it's ready, and have a phone number set up plus divert mail there for the time it takes to resell the home. For all purposes it will be primary at that time.

Thanks for all the information!
Interesting that nowhere did you say you were buying a condominium, yet somehow I got that notion stuck in my head. (I'll edit to correct my mistake) Good luck with your new home.
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taxguru wrote:Interesting that nowhere did you say you were buying a condominium, yet somehow I got that notion stuck in my head. (I'll edit to correct my mistake) Good luck with your new home.
Thank you. And thanks for taking the time to respond to my question(s)!

:lol:
:idea:
"Our doubts are traitors, And make us lose the good we oft might win By fearing to attempt."
William Shakespeare Measure for Measure

"You have to go in with a winning attitude. It doesn't mean you'll win, but you'll lose a lot less" - Brad Lamb ("Toronto's Condo King")
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taxguru wrote:Interesting that nowhere did you say you were buying a condominium, yet somehow I got that notion stuck in my head. (I'll edit to correct my mistake) Good luck with your new home.
Because it's usually strata properties that are pre-sold in this manner?

Capital gains taxes suck, but then again, you're making money and that's a good thing!

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