When you sell personal use property such as a car, jewelry, or furniture for more than you paid for it, you have to report and pay income tax on the net capital gain. The definition also includes real property, including the principal residence you own.
The Income Tax Act provides a principal residence exemption for capital gains on the sale of your home.
If the home has been your principal residence for the entire time you have owned it, the principal residence exemption eliminates the capital gain and there is no need to report the sale on your tax return.
What Is A Principal Residence?
Your principal residence is a housing unit that you own outright (individually) or jointly with another person. This includes a house, cottage, condominium, apartment, duplex, or mobile home. It also includes a share in capital stock of a cooperative housing corporation that you have acquired that give you the right to inhabit the property. It may even include houseboat!
The home can have up to 1/2 acre of adjacent connected land. In some cases more land may be included in this definition if it was necessary for the use and enjoyment of the house.
Ownership itself is not enough to qualify the property as your principal residence. You, or a member of your family, must also ordinarily occupy the property and you must designate the property as your principal residence (see Reporting The Capital Gains Exemption below).
Who Can Claim The Exemption?
In the past, both spouses’ were each allowed to claim a principal residence exemption. This meant that a married couple could have had two different properties and each spouse could have claimed a tax-free capital gain exemption on both properties.
This all changed in the early 1980’s when the Income Tax Act was changed so that only one property could be designated as the principal residence exemption for each family unit and for each year after 1981.
If a married couple purchased a properties before 1982 that qualified as their principal residences, they can claim the exemption on both properties up to 1981 and on only one after 1981.
Reporting The Capital Gains Exemption
You designate a property as a principal residence using CRA form T2091. However, you only have to report the sale to the CRA if there is still a capital gain after you have applied the principal residence exemption.
Calculate The Principal Residence Exemption
For formula used to calculate the principal residence exemption is:
[(1 + # of years the home was your principal residence) / # years you owned the home] x The Capital Gain
The extra “1” in the formula provides an allowance for the tax year in which you sell your principal residence and purchase another in the same year.
NOTE: A capital loss that results from the sale of the principal residence or any personal use property is not allowed under the Income Tax Act.
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