Selling or Renting Your Home? Consider the Taxes!

Selling or Renting Your Home? Consider the Taxes!

Home ownership is an important wealth building tool for many Canadians.

Traditionally, that has meant diligently paying down the mortgage until it comes time to sell and downsize, thereby freeing up the remaining equity as their “nest egg.”

But increasingly over the past decades, real estate has become more complex for a growing number of homeowners. People rent out basement apartments, or they rent their entire home or vacation property on a short- term basis through sites like Airbnb or VRBO while they travel or live elsewhere. Many others are acquiring a second property to use for rental income.

Selling and renting real estate are activities that must be declared on your income tax return, and these situations can trigger tax consequences. It’s important to understand how these potential money makers can affect your tax bill, either now or down the road. Here are a few considerations to get you started:

The importance of the principal residence exemption
You’re allowed to declare one principal residence per year, which you can sell without paying income tax or capital gains tax. This falls under the principal residence exemption which applies if the property was your sole principal residence every year it was owned. If you have a cottage, this should be reviewed to see which property make more sense being your principal residence for tax purposes.

Secondary residences in Canada are taxable. When you sell a property that is not your principal home, you may have to report all or part of the capital gain. In certain circumstances, such as if you buy and sell frequently, the proceeds could be considered business income.

Renting out part of your home
If you rent out a part of your home, such as a basement apartment, you must declare that income on your tax return. The upside is that you can claim a number of expenses to help reduce the taxes payable on that income, provided you are renting at fair market value. Some of these can be deducted in full and some can be claimed in part based on the percentage of your home that is rented.

Keep records, get advice
In all cases, it’s essential to keep meticulous records covering rental dates, amounts collected, and expenses incurred, as well as all receipts.

The tax rules around real estate are intricate and depend upon the particulars of each situation. Your advisor works closely with a team of tax experts and can provide guidance to ensure that your real estate rental situation remains a profitable one without any unexpected tax consequences.

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