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Capital Gains Change A Mixed Bag For Homeowners

Capital Gains Change a Mixed Bag for Homeowners

The federal government’s changes to capital gains taxation that were included in its 2024 budget will hurt some homeowners.

When they come into effect June 25, the inclusion rate will increase from one-half to two-thirds on capital gains above $250,000 for individuals. This means that when a capital asset like residential real estate property is sold for more than it was paid, 50% of the first $250,000 is taxable and for every dollar beyond $250,000, 66.7% is taxable.

If you purchased a cottage for $300,000 and later sold it for $900,000, that would be a capital gain of $600,000. (A capital gain is the difference between an asset’s cost and its total sale price.) Right now, the taxable capital gain would be on $300,000. However, under the new rules, that same cottage would be subject to a tax on 50% for the first $250,000 of the capital gain and an additional tax on 66.7% of the $350,000. In this scenario, the taxable gain would rise from $300,000 to $358,450.

How much you would actually pay on these gains would depend on your marginal tax rate.

Cottage owners aren’t the only ones who will affected by the tax changes. Investors who own property not used as their primary place of residence will be impacted, too. This includes people who own a condo unit, for example, and rent it out.

Certain situations don’t trigger a taxable capital gain. If you sell your principal residence for more than you paid, those gains are not taxed. A principal residence is defined as a dwelling that a person inhabits most of the time. Only one property can be designated as the principal residence. It can be a house, condominium, cottage, apartment, trailer, mobile home or house boat.

For those who inherit property from, for example, their parents, it will be exempt from the capital gains tax when it is transferred, so long as the property was the only one they owned when they died. (Other tax consequences may apply.) However, when you sell your parents’ primary residence after inheriting it, there will be a taxable capital gain on the sale if it makes a profit. But the taxable amount is not the increase in value since they purchased the home years ago; rather, it’s the increase in value since you inherited the property at the assessed value, as determined by the Municipal Property Assessment Corp.

Suppose your parents bought their house decades ago for $150,000. You inherit the property when the assessed value is $950,000. If you sell the property for $1.2 million, that would be a capital gain of $250,000, not the 1.5 million increase in value since the time your parents purchased their residence.