Capital Gain
Capital Gain symbolizes the increase in the value of the capital asset and is realized when this capital asset is traded. The capital assets can represent investment and private possessions such as stocks, funds, bonds, real estate, precious arts, etc. And in real estate, it can also be called capital property, on which a capital gain is incurred during the time of sale. Inversely, when the capital asset loses its value and is sold for lower than the purchase price, it’s termed as a capital loss.
When a capital property or asset is sold for a more elevated price than it was purchased for, then the capital gain is realized at the moment of sale. The realized and unrealized gains differ as the unrealized gain represents the growth in the value of the capital property that you have but has not yet been sold for cash or converted into an alternative investment position. Whereas realized gain refers to the dollar value of money that has been gained as profit. Therefore, unrealized gains become realized with the sale of the underlying capital asset.
Calculation
In real estate, capital property refers to any property or real estate you own, but it is not your principal residence. Furthermore, if it is sold for a profit, you will be obligated to pay tax on any capital gain realized. In general, when a real estate property is purchased and sold, the buyer and the seller may be required to pay additional closing costs on top of the purchase and sale prices, respectively, after the transaction is completed.
When calculating your individual capital gain amount, you need to determine Adjusted Cost Base(ACB), expenses incurred during the sale of capital property, sale amount.
Capital Gain = Property Selling Price – ACB – Selling expenses
Adjusted Cost Base(ACB): The purchase price of the property, as well as any additional expenses you incurred to obtain it in the first place. Fees, commissions, legal fees, and other charges are examples of these costs.
Selling Expenses: Any additional costs you paid to prepare and sell your capital property. Such as legal fees, realtor fees (if you engaged a realtor to sell your home), fixing-up costs you utilized to make it marketable, the survey fee, transfer taxes when you sell your property, etc.
Capital Gain TAX
In Canada, when you sell your capital asset or property, only 50% of the capital gain is taxable and not the total capital gain amount. So only 50% of the net proceeds are considered taxpayers’ taxable income.
For Example, let’s say you purchased a duplex at $500,000, and by the time you sold, $100,000 has been added to the valuation of a property. Therefore earning a capital gain of $100,000. But only half of the $100,000, i.e. $50,000, would be included in your taxable income.
Selling Principal Residence
When it comes to earning capital gain on selling a real estate property or home, Principle Residence is mostly exempt from the capital gain taxes. The principal residence exemption means you won’t owe any taxes when you sell your property or are deemed to have sold it. Total capital gain tax exemption is valid only if the property was exclusively your primary residence for the entire time you owned it. But suppose this property was not your primary residence for each year during the whole ownership tenure. In that case, you must report the portion of the property’s capital gain that applies to those years.
Capital gain tax and principal residence exemptions work out differently if you used a part of your home to generate cash or earn income, such as renting out space or conducting business operations and used the remaining part of the home as your principal residence. In that case, you must divide the sale price and the adjusted cost base between the portion of the property used as your primary dwelling and the remainder of the property utilized for any other purpose.
