For those who have more than one property, it is important to make the right decision when it comes to designating the right property as your ‘primary residence’ for tax purposes.
There is a primary residence capital gains exemption available for one property for each married or common law couple in Canada. This means when you sell your property there will be no capital gains tax (normally calculated as the gain in value of your property x 50% x your personal marginal tax rate in the year it is sold).
This capital gains exemption can save Canadian homeowners tens of thousands of dollars in tax when they sell their home, and can make home ownership even more valuable, since most other investments are taxed on their growth (capital growth, dividends, interest, etc.) unless sheltered in a tax-advantaged account.
For those who own more than one property, it is important to note you can only designate one property as your ‘primary residence’ for each year of ownership. The good news is, almost any property can qualify as your primary residence, even if you only spend a few weeks there each year. It must be inhabitable (so it can’t just be a piece of property), but it can be a house, condominium, cottage, mobile home or trailer.
From a tax savings perspective, the property you should deem as your primary residence should be the one that has gone up in value the most since purchase. The good news is you do not have to make this election until you sell one of your properties. There may be circumstances where you choose to designate the property that appreciated the least as your primary residence if you want to delay taxes owing, but always consult with a qualified tax expert before making any decision on this.
You can also split which property is your primary residence. In fact for every year that you own more than one property, you can decide which residence is your primary residence for the purpose of the capital gains exemption.
The ‘Plus 1’ Rule
Even when you designate one property as your primary residence for all the years you hold it, there may be value in the exemption for your other property. This is because the calculation that results in a 100% exemption of one property only requires that you designate it as your primary residence for all the years less one year. This ‘spare year’ can be used towards your other property, effectively making it exempt from capital gains tax for that year (plus another +1 factor on that property).
You may choose to think about this as two free years of capital gains exemption for your non-primary residence. Put another way, if you hold a second property for 10 years, 2 of those 10 years (or 20% of the capital gains) will be exempt from capital gains tax – not a small benefit.
Home ownership has a lot going for it beyond the financial aspects. But when it comes time to sell it, and you are facing a decision regarding which years to designate it as your primary residence, please consult a qualified tax expert. You don’t want to leave money on the table or make the wrong decision that could cost you thousands of dollars.