Capital Gains Tax:

Owners of income producing properties crystallize the property's value as of specific dates to establish a base to be referenced at the time of a future sale or change of use.

I am often asked to appraise properties in one of these situations:

1. The property was at one time a 'principal residence', but then the use was converted to 'income property'.

2. An 'income property' may have been converted to a 'principal residence' at some point.

3. The owner has lived in half of an 'income property' and the second unit was rented.

In each of these 3 scenarios the issue of Capital Gains Tax arises. When that happens an appraisal of Fair Market Value is required by the CRA for measuring the taxable portion of the gain

Designating the Principal Residence:

You and your spouse/partner/children are permitted to designate one home as your principal residence for any particular year. If you happen to own two homes, or a home and a cottage, only one property can be designated as a principal residence at any given time.

If you happen to move out of your home and rent it, you may still be permitted to treat the property as a principal residence under certain circumstances.

Your accountant will be able to advise you regarding the most efficient property to declare

The Rate of Capital Gains Tax:

Capital Gains Tax is calculated as 50% of the net gain on the property taxed at the owner’s marginal tax rate in the year of transfer.

Situation 1: A Principal Residence is converted to a rental property.

Purchased as Principal Residence in 2000 for $500,000

Converted to Income Property in 2007.

Sold in 2013 for $1,000,000

The owner would pay a Capital Gains Tax on the difference between the values in 2007 and 2013.

There would be no tax payable for the period between 2000 and 2007.

The tax implications are based on the change in value between 2007 and 2013.

Situation 2: A Rental Property is converted to a principal residence.

Purchased as a Rental Property in 2000 for $500,000

Converted to Principal Residence in 2007

Sold in 2013 for $1,000,000

The owner in this situation would pay a Capital Gains Tax on the difference in values between 2000 and 2007.

There would be no tax payable for the period between 2007 and 2013.

The tax implications are based on the change in value between 2000 and 2007.

Situation 3: The Owner Lives in a Portion of an Income Property

Purchased Duplex in 2007 for $750,000 (and rent out one unit for $2,000 per month you would report your annual income from rent ($24,000) and offset this income with expenses associated with the rental unit).

Sold in 2013 for $1,000,000

The owner in this situation would find a tax shelter by claiming half of the property as a principal residence. The tax on the gain would be 50% x $250,000 = $125,000 x 50% = $75,000 x marginal tax rate.

(Consult your accountant or CRA regarding your own situation)

The Appraisal:

In any event the CRA will require a Formal Appraisal of the subject property as of the applicable conversion date..

With full access to historical sales, whether on MLS or privately sold, I am able to accurately appraise the property as of the 2007 transition date.

Often, on the advice of their accountant, the client will proactively request the Appraisal at or near the time of the transition, thus establishing a base price for future calculations.