Do you know how long do you have to live in a house to avoid capital gains in Canada? Well, there are specific regulations about it in the Canadian property law. You have to live in a home every year you own the house to avoid paying capital gains taxes in Canada.
There are ways to reduce capital gains, but if you ever used the property as a rental property or even had your relatives live in it, then you may have to pay. If you haven’t been paying taxes on your rent all this time, then you’ll have to catch up on your rental taxes when you sell the home, too.
There are some ways to manage the costs of capital gains taxes. Here’s what you need to know.
- 1 How Long Do You Have to Live in a House to Avoid Capital Gains in Canada: Selling Too Quickly Can Be Expensive
- 2 Staying Put Can Pay Off
- 3 Pay Attention to Your Equity
- 4 Timing Can Help with Taxes
- 5 Do Seniors Have to Pay Capital Gains?
- 6 When Waiting Isn’t an Option?
- 7 Need Legal Assistance from An Experienced Real Estate Property Lawyer?
How Long Do You Have to Live in a House to Avoid Capital Gains in Canada: Selling Too Quickly Can Be Expensive
How long should you own a house before selling? How soon can you sell a house after buying it?
While technically, you can sell a home a day after you buy it, there are reasons why you might not want to do that. You’re likely to lose money because you won’t have enough equity to pay the mortgage or even cover the closing costs and transaction costs, such as your legal fees and the real estate agent’s commissions. The transaction costs alone can add up to 10% to 15% of the home’s sale price. While you may save a little on your taxes through the capital loss deductions, you’re unlikely to come ahead.
Most experts recommend staying in a home for at least 5 years, and many recommend staying at least 10.
Info for United States residents: in the US, you end up paying capital gains taxes on even a primary residence if you lived there less than 2 years. In Canada, you do not pay capital gains on a primary residence as long as it was your primary residence every single year that you lived in the home.
Staying Put Can Pay Off
Real estate tends to appreciate. Canada has particularly hot real estate. The 10-year average for home price increases at 81%. This means if you keep your home for 10%, you’re likely to sell it for 81% more than you bought it for.
A simplified example: a $100,000 home will probably sell for $181,000 ten years from now.
Yes, you’ll have to pay capital gains tax on the $81,000. Just remember, you can factor in the closing costs and transaction costs and the money you put into improving the property. Your taxable amount can be much less…and only 50% of that $81,000 would be added to your income. You’d then be taxed in whatever tax bracket you fall into.
In short: you’re going to come out way ahead if you wait.
Pay Attention to Your Equity
Our simplified examples assume you own the house outright, but if you don’t, you’re going to have to account for your mortgage.
If you took out a 30-year mortgage on that $100,000 home and then sold it 10 years from now, you’ve paid off roughly 33% of the home by the time the sale comes around. You owe $66,000 on the home and sell it for $181,000.
You’re only going to get a check for $115,000.
They say the adjusted value of your home is $120,000 after your closing costs, transaction costs, and improvements are taken into account. Now your gains are $61,000. $30,500 of that is now taxable income. If that pushed your income to the highest tax bracket of 33%, then you’d owe $10,065 on the home.
What remains in your bank account after paying taxes is $104,935. A total of $84,935 in profit when all costs are accounted for; you even recoup some of your costs.
But if you owed far more on the home, you might eat all into your profits very quickly. Say you’ve been in the home for 3 years and have paid off just 10% of your mortgage. Real estate prices have only gone up to $110,000. $90,000 goes straight to the mortgage company. You get $20,000. You’ve realized a small capital gains loss of $10,000.
You don’t have to pay taxes and, in fact, get a $10,000 break on your income tax…but your profits have dwindled down to $10,000, and that’s only if you get the buyer to cover the transaction costs. If you have to pay those, you lose another $15,000, which means you only get $5,000 from the home sale…barely enough to cover a down payment.
Timing Can Help with Taxes
Most investors have more than one investment and often sell multiple investments to manage cash flow. If you take a loss on some of your investments these will ultimately be factored into your taxes and will reduce your tax burden.
You can also time your sale for years when your income is lower if you have variable income, strategically targeting a lower tax bracket.
Do Seniors Have to Pay Capital Gains?
Canadian law is different from United States law, which does make some exceptions for seniors.
There are no exemptions for seniors in Canada’s tax code. The only exemptions are whether or not the home was used as a farm or fishing property or whether or not the owner lived in the home every year that they owned the home.
When Waiting Isn’t an Option?
Sometimes you have to sell the home whether it’s an ideal time to do so or not. If that’s the case for you, then consulting with a real estate lawyer can help. We might be able to suggest other options. We also suggest discussing your options with a tax professional.
Need Legal Assistance from An Experienced Real Estate Property Lawyer?
We hope now you understand how long do you have to live in a house to avoid capital gains in Canada. Our legal team has decades of real estate experience. Make sure your interests are protected when you buy or sell your real estate. There are many issues to tackle, and we help with all of them. Call (780) 488-4152 to set up an appointment today.