paying tax on the vacation property or house

My question is: Canadian-specific

QUESTION: I want to sell my vacation property, which is not my principal residence. It has increased in value three-fold in 10 years and I want to minimize my capital gain tax. I am planning on buying another vacation home soon after.
If I arrange with the buyer, if willing, to hold part of the title and become their lender, can I transfer title as they pay down the principal, declare their interest as income, but spread the capital gain over multiple taxation years? If this plan works, what are the pitfalls, assuming I am willing to take the risk of the buyer's credit?

david ingram replies:

1. You have the choice of making the vacation home your personal residence and claiming it tax free if you wish. If you choose to do so, the home you live in is now subject to capital gains tax covering the same time period. BUT, you do not need to calculate the tax or pay it now. It only becomes a problem when you sell that home. Even if it has gone up more than the vacation property, a good argument can be made that the deferred taxation is worth taking a future hit on a larger profit. Of course, this depends upon how long, how much and the tax law int he future.

2. you can carry the paper and defer the tax on the vacation home over a five year period. However, this is really only a good idea if you do not need the money to buy the next home. If you do, the non-deductible interest paid on the next house AND having to pay tax on the interest you are receiving will likely exceed any perceived tax saving by spreading the capital gain over five years.

Time to get to work on the spread sheets.