There are many taxes that come into play in real estate. For example, your primary residence will be taxed differently than your investment property. Speak to your real estate agent for advice and guidance when it comes to your properties and the taxes you will be expected to pay. Capital Gains are one of the most important taxes to ask your agent about, especially if you are preparing to sell your rental property.
What Are Capital Gains?
Capital gains are a tax that is charged on all assets that increase value over time. This includes property, stocks, artwork, collectibles and any other personal goods. For this example, the seller of a rental property is required to pay the tax once the land is sold. These taxes are also payable when gifting or giving away the property.
How Are Capital Gains Calculated?
Capital gains are calculated by taking half of the increased earnings and charging the seller’s marginal tax rate. The more you earn the higher your marginal tax rate is. For example, if you purchase a property at $300,000 and sell it at $400,000 your capital gain is $100,000. 50% of the capital gains are taxable therefore you will be taxed on $50,000. The highest marginal tax rate in Canada is roughly 50%. So, your tax liability will roughly be $25,000. Again, that is the HIGHEST tax rate in Canada. Your tax rate might be lower.
Can I Lower My Capital Gains?
There are a few ways you might be able to be taxed less by the government. The first is to sell your rental property during a lower-income year. You will pay less in capital gains tax during those years as your gain was not as significant.
You can also try maximizing your capital improvements. Capital improvements can reduce the taxes on the property sale. They increase the cost amount of your property for tax purposes. The higher cost for the improvements will result in a smaller gain on the sale. Things like renovating the kitchen, changing the windows, upgrading the appliances all count as capital improvements. Note that simple rental repairs are not considered improvements. These types of repairs include painting, cleaning carpets, or fixing faucets.
For more information on how capital gains will impact the sale of your rental property please contact us today.
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