After all, everyone knows that you are not required to pay capital gains tax on your home, right?
While it is true that you do not pay capital gains tax on your personal dwelling, you need to keep in mind that there are very specific rules around this exemption. Should you fail to follow these rules, you may be required to pay capital gains tax on all, or some portion of, the profit from the sale of your home.
Principal Residence Defined
It is the existence of the Principal Residence Exemption that allows you to forego paying any form of capital gains tax on the profit you make when selling your home. Having said that, you must ensure that your home meets the strict definition of “principal residence” for the entire time that you own the property. More than one homeowner has learned the hard way that after selling what they consider to be their home and main residence, the tax man does not share the same view and capital gains are now owing.
To avoid this costly situation, let’s first look at what qualifies as your principal residence.
For starters, the Canada Revenue Agency allows for considerable leniency regarding the type of home that can serve as your principal residence. Everything from trailers to condos are permitted, but whatever form your principal residence takes, there are four requirements all homes must meet in order to be recognised as your principal residence. These are:
– The home must be owned by you or jointly with another person.
– You, your current or former spouse or common-law partner, or any of your children, must have lived in the home at some point for each year that you are claiming the home as your principal residence.
– The home must be a housing unit, a leasehold interest in a housing unit, or a share of the capital stock of a co-operative housing corporation acquired only to get the right to inhabit a housing unit owned by that corporation.
-You declare the home as your principal residence by listing it as your address on official documents such as your tax return.
In addition to the requirements listed above, you may only designate one principal residence per family at a time.
The key point to remember is that maintaining ownership alone is not sufficient to preserve the principal residence designation. For any period that you, your spouse, or your children are not living in the property, and even if you retain ownership, the property cannot be considered your principal residence for that time period.
Consider, for example, situations where owners might not live in the property for several years; this may be the result of a temporary relocation to another area for work or schooling. During this time, unless your spouse or your child continues to live in the house, the property is not considered to be your principal residence.
This means that when you sell the property, for any year that your home is not your principal residence, you will be required to pay capital gains tax for that period. The Canada Revenue Agency has a worksheet available to help determine the taxable amount for such situations.
If you have questions to do with your principal residence designation, fill out the form at the top of the page and speak o a MonsterMortgage.ca mortgage expert today!BACK TO NEWS FEED