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Personal Income Tax -> Are Real Estate Sales Taxable?
Real Estate

Real estate sales - are they taxable?  What about my principal residence?

The gain on the sale of real estate is a capital gain unless the property has been purchased with the intent of reselling at a profit, or developed and sold as a business endeavor.  If it is considered a business transaction, the entire profit or loss on the sale is taxable or deductible.  If the transaction is a capital gain (principal residence, summer cottage, second home, rental home, etc.), only 50% of the gain is taxable.

If the property is the taxpayer's principal residence, the principal residence exemption may eliminate all or part of the capital gain.  This exemption is claimed by including form T2091(IND) with the tax return for the year the property is sold.  CRA's policy is that the form need not be filed unless there is a taxable gain after deducting the principal residence exemption, or a capital gains election was filed in respect of the property in the taxpayer's income tax return for 1994.  However, if there is any question as to whether the principal residence exemption applies in whole or in part, it would be wise to file the form anyway because failure to file the form could result in a disallowed principal residence exemption.

There aren't any set rules about how often a person can buy or build a house, move into and reside in it, then sell it, without the transactions being considered business transactions.  Canada Revenue Agency (CRA) would look at the frequency and the intent (i.e., whether the houses were being purchased or built with the goal of reselling and making a profit, or because the person wanted a new house to live in or to rent out).  They might even look at a single event of purchasing or building and reselling a house and decide that it was a business transaction, even if the house has been used as a principal residence.  Check out the current version of Interpretation Bulletin, IT-218, re profits on the sale of real estate, especially the first few paragraphs.

If land is purchased without a housing unit on it, that property cannot be considered the principal residence until the year that a house is built and you move into it.

CRA usually considers that if there is more than 1/2 hectare (1.25 acres) of property, only 1/2 hectare of the land can be considered part of the principal residence, and there would be a capital gain on the excess when the property is sold, even if the rest is the principal residence.  However, they also consider whether the property is subdividable.  Thus, if the property is 2 hectares, and is not subdividable, they may consider the whole amount of the land to be part of the principal residence.

There was a lot of information on this topic in CRA's Interpretation Bulletin IT120, Principal Residence, including the part about building on vacant land, the 1/2 hectare rule, etc.  This bulletin also contains a link to form T2091(IND) for the principal residence exemption.  This bulletin is no longer available - it was replaced by the following income tax folio on March 28, 2013:
bulletS1-F3-C2: Principal Residence

 

Tax Tip:  Before making any real estate investments, make sure you know the tax consequences.

 

Revised: February 19, 2014

 

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