Capital Gains on Real Estate

[drasticmeasurements]

I own two condos in Toronto, one free and clear that my sister lives in and the other which has a small mortgage that is my principal residence. My sister will be moving out sometime this year. The condo she lives in has doubled in value for a profit of $400k which I understand i will have to pay capital gains on upon disposition if I just sell it.
I would prefer to sell my principal residence and move into the other condo when she vacates. If I do so, am I still on the hook for the capital gains?
How is the capital gains calculated? I have googled and get conflicting percentages from 20% to 35% of the “profit” after all costs of sale deducted. Many thanks.

 

[mdnich]

@drasticmeasurements Capital gains exemptions only apply to your principal residence, and only for the time that you actually live there. Moving into the condo today will only stop you from paying capital gains on increases that happen after today. It will not change anything in regard to the increase in value that’s already occurred unless you’re up for some good old fashioned fraud.

Capital gains means that half of the increase in value gets taxed along with your income for the year. If your condo has made $400k, $200k will be added to your income and you’ll pay income tax on that amount. The exact rate will depend on the tax bracket you’re already in.

 

[curiouswalrus]

@mdnich If they moved into the condo today, how is the value of the condo determined?

 

[mdnich]

@curiouswalrus The appreciation from the time OP bought the condo until the time OP moved in would be capital gains. Any appreciation after the date they moved in would be exempt. There are appraisers who do this type of evaluation and would be able to calculate these values.

 

[drasticmeasurements]

@mdnich Thanks.

 

[drasticmeasurements]

@curiouswalrus I would think market comps and a professional appraisal.

 

[drasticmeasurements]

@mdnich Nope, not into fraud. That’s pretty much what I thought, thanks.

 

[drasticmeasurements]

@teachermike The topic was mentioned in passing. I didn’t need you to elaborate, thanks.

 

[teachermike]

@drasticmeasurements One common way to fraud is if you have a corrupt appraiser. They would evaluate it at a low value. You would then move in and sell it at market value in a year or two. Those gains wouldn't be taxable because it's your principal residence.

But it's a risky move, likely to get everyone involved in trouble. It sets off flags if the estimated value is completely off from the market value in a short timespan.

Also, some places started enacting some laws about flipping houses. It was too easy to move in somewhere, do some renovations, then sell. Before the laws, that profit wouldn't be taxed, since it was your principal residence. I don't remember the details, but it was something about the increase of value and the duration of the occupation being less than a year or two.

Obviously, I'm just mentioning this because the topic came up and not as some advice to follow.

 

[jamedoc]

@drasticmeasurements A couple things here

If you're renting to your sister

- If you sell your own property, you can claim principal residence exemption on your current condo, and not have to pay taxes on the "profit" for your current condo.

When the rental property is converted to principal residence, you pay tax on the "profit" of the rental property to the date of conversion unless you file an election under subsection 45(3). This election cannot be made if you've claimed tax depreciation on the property.

That election defers paying the tax on the 400k gain until you sell the sister's condo.

https://www.canada.ca/en/revenue-ag...-business-property-a-principal-residence.html

If she's just living there rentfree, would say it's personal use property rather than rental property. So the above wouldn't apply, and if your sister's property has appreciated more (per year) than yours, you can claim the exemption on that property instead for the years owned, pay taxes when you sell your current condo, but save taxes down the road.

If you're confused... ask an accountant.

 

[drasticmeasurements]

@jamedoc Thanks very much. I definitely need an accountant this year!