If you benefit from selling a piece of real estate that is not your principal residence, you will be responsible for the capital gain tax. You profit when you sell your home or property for more money than what you paid for it. Capital gains tax is applied to half of the gain from selling a capital asset or property rather than the entire gain. For example, let’s say you bought a duplex for $500,000 and sold it for $100,000 more than you paid for it. Taxes on $50,000 of the $100,000 would only be due, which is only half of what you actually made.
Maximize Your Tax Deduction
The capital gain is the amount earned from selling the property after deducting any costs associated with the sale, such as legal fees and real estate commissions, minus any money spent on improvements such as kitchen upgrades, renovations, and the installation of new furnaces, and deducting the adjusted cost base (ACB). All these selling charges, such as legal fees, realtor fees, fixing-up costs you incurred to make your home more desirable, the survey fee, and transfer taxes, can all be deducted from your taxable income when you sell your home. So if you keep all your proof of payments and supporting documents of outlay sustained, you can use them to maximize tax deductions and minimize your taxes.
Capital Gain Reserve
Typically, when a capital asset is sold, you would receive the full price as a seller at the time of closure and incur capital gains. On the other hand, you can defer your capital gains to avoid paying excessive capital gains tax by claiming capital gain reserve if you are eligible. Rather than receiving the entire sale proceeds in one lump sum, you have the option of spreading them out over five years when selling your home.
Let us consider the following scenario: you sold a house and realized a $100,000 profit. You have the option of accepting $20,000 right away and the rest cash over the next five years if you wish to do so. This has the effect of reducing both your income and, as a byproduct, the amount of tax owed for the year in question.
Contribute to Tax Deductible Accounts
To maximize your tax deductions to minimize the tax payable at the end of the year, if eligible, you can leverage your tax-deductible accounts, for example, RRSP, RESP, RDSP or TFSA. If you have an eligible contribution limit, you may be able to reduce your personal income as an outcome of this.
Sell Capital Property at Right Time
Sometimes, transaction date and time can play an essential role in calculating your capital gain tax. Whether you sell your property in December or January for the same tax year, your capital gain tax payment deadline will be at the same time. If the tax deadline for next year is in April, you will have only four months to pay taxes compared to someone who sold in January would have had nearly a year and four months to pay taxes. For example, if the tax due date is in April for next year, you who sold in December will only have four months to pay taxes, while somebody who sold in January would have almost one year and four months. These extra months can provide colossal time leverage for an investor, which they can use to invest the gains earned from the previous sale to generate more income. It’s like using existing money to make more than just taking money from the sale and using it to pay taxes.
Additionally, if it works for you, you can wait to sell your capital property during a year when you expect that your income will be lower. For example, if you are going on maternity leave next year, you can schedule the sale of your capital property in the same tax year; this will help you keep your average income low. Therefore reducing your tax payable on your capital gains.
Offset Capital Losses
Consider using capital loss offsets to minimize a yield in the capital. You make a capital loss when you sell or are considered to have sold a piece of capital property for less than its adjusted cost base plus the costs and expenses of selling the property. For the most part, if you have an acceptable capital loss, you can deduct it from your taxable capital gain for the year in which it was incurred. In general, if eligible, capital losses can be carried back to the prior three years or forward to balance past or future gains in the same account.
Say you made $100,000 in profits but lost $20,000 in the capital on another venture. After deducting the loss from the gain, your net income is only $80,000. As a result, you’ll only be taxed on $40,000 rather than $50,000.
