QUESTION: My wife and I purchased a new home 5 years ago. We have been renting out our previous one since. We are thinking about selling the rental property. We will profit $70000 on the sale before paying off the $30000 mortgage. Will we be required to show capital gains or could we invest it in our new home? Would the capital gains be on the $70000 or the gain minus the mortgage on the house?
Thanks,
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david ingram replies:
The capital gain is calculated as the difference between its value the day you moved out and the amount you sold it for less costs of the sale such as real estate commissions, fixing up expenses, and legal fees.
You do have the opportunity to claim that house tax free by filing form T2091, but you should have made an election under section 45(2) the first year you rented it. The problem with this:
It makes thhe house you are living in taxable for the same time period. If it went up more than the $70,000, you will owe more than the tax on the first house. This 'can' be beneficial if you do not intend to sell your present home for another ten or twenty years. The reson is because of the present value of the money. i.e., it is usually better for your finances to pay $20,000 ten years from now then to pay $10,000 today. It will ALWAYS be better if you do not need to pay the $20,000 for twenty years.
At the moment, I have never seen the CRA turn down a late section 45(2) election.
The following older question on income tax help will help explain section 45(2) to you.
QUESTION: Hi David,
Please help.
I bought a Calgary condo in Oct 2003, and lived in the condo until March 2005, when I bought my present house.
The condo was rented from April 2005 to August 2006, and I sold it in Nov 2006, at a gain.
My question: Would I qualify for the Principal Residence exception and be exempted from Capital Gains tax for the condo sale?
Thanks.
Best Regards,
