We almost always talk about the current market condition for housing in Canada with our blog entries here, but as any of you who do read here at least semi regularly will know from time to time we’ll put in an entry where we talk about the different knowledge bases that realtors can add for themselves to improve their level of expertise when it comes to being a real estate agent.
It is like any other profession where even if you come in as prepared as can be there’s still so much to learn, and as we know giving clients good advice with regards to the buying and selling of real estate is one of the most effective ways to ensure you’re their realtor again the next time they’re looking to make a move in the local real estate market.
Many of these people that do make more than one purchase in real estate are going to be investors, and if they’re making those purchases in quick succession of each other they are almost certainly buying as investors. But at the same time not every homeowner that owns more than property is going to be an investor. There are plenty of reasons why capital gains taxes exist, and if home flipping wasn’t so much of a big problem there might no be as much of a need for them.
But there are ways for clients to save on capital gains taxes for secondary property sales, and if you have clients that are in this scenario this is one example where this type of information will be very much appreciated. Realtors who are newer to the business may not be aware of it, and they may also be struggling to drum up new clientele in first place. Not everyone is blessed with rhythm and the ability to drum well as it is, but our online real estate generations system can give you and advantage there.
So let’s get right to them
1. Split the Principal Residence Exemption
The principal residence exemption makes it possible for Canadians to sell their primary home without paying tax on the profit. People with multiple properties can strategically split the exemption between their homes to reduce the amount of tax they’ll need to pay. Whether they’re selling a cottage or a house, you will want to start with knowledge of what you bought the properties for, and how much did they appreciate up until this date?
With cottages and vacation properties it is also possible to designate it as your principal residence for all or some of the year. This makes it so that the taxable gain is entirely exempted or significantly reduced, but your clients will need to be aware that the actual home will not be eligible for the principal residence exemption during those years. How this connects to their life insurance may also become a consideration.
If a large tax bill eating into their estate upon death is problematic then it’s probably best to save the principal residence exemption for their primary home. A rental property or renting a portion of their home can complicate matters too as the principal residence exemption is not applicable or otherwise pro-rated to the part of the home that’s not used as a rental.
2. Claim Sale Expenses
We do know that the government has a fairly low bar for claiming a property as a principal residence though, and the legal fees, realtor commissions and house repairs that go into selling the property can be claimed as exemptions. Finders fees, commissions to realtors or brokers, legal fees, land transfer taxes, advertising costs to list it – all of these and more that go into finding and connecting with the buyer can be claimed as expenses.
These become standard things upon looking for someone to buy it and executing the sale of the property with professionals, and the entirety of those costs can be deducted from the actual gain. In a sense it’s as if these expenses are added to your cost basis and it defrays what you need to pay in capital gains taxes. The only tricky one though is with claiming renovations because an owners will need to prove to be able to prove they were essential in order to sell the property.
3. Use Capital Losses to Offset Gains
In much the same way as it works for stock market investments, gains from one investment can be used to offset loses from another one when a client owns multiple homes and their secondary home is being considered as capital property. It’s not unlike tax-loss selling strategies investors often use in December. Using them to lower the taxable capital gain generated by the property sale is a valid strategy in the event the property owner has incurred stock market losses in a non-registered account in the current or previous years.
This can be very helpful when the primary residence exemption isn’t applied, and the owner has not option but to have the property being sold as secondary residence. There is more to this topic than one blog entry would allow, and there’s likely more that a tax expert will be able to tell you about this than we can. But it is very good information to have in your bank when you are working with investor clients who are selling properties often to finance the purchases of other ones.
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