Money Capital gains tax when selling a rental property

21:01  09 february  2018
21:01  09 february  2018 Source:   moneysense.ca

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Capital gains taxes come whenever you sell an asset for a profit. For 2015 and 2016, the capital gains tax Offset Gains With Losses. An effective way of reducing your tax exposure when selling a rental property is to pair the gain from the sale with a loss in another area of your investments.

This reader wonders if he can buy his parents’ rental property . Watch out for probate fees!

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Q. For the moment it seems that capital gains are taxed at 50% of the value. My parents own a rental property. Would it make sense to “buy them out” now and pay the capital gains at 50% rather than wait for the inheritance and risk being taxed at 75% in the future? I assume that this is done at fair market value (FMV), but can I buy the property at less than FMV to save on capital gains tax now or are we forced to pay the 50% at FMV? I have no plans of selling the rental property in the future.

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Capital gains taxes come due when you sell an asset for more than the money you have invested in it. If you're not looking to take cash out of your rental property , you can simply roll one investment into another in a 1031 exchange to avoid paying capital gains tax .

A couple plan to move into a home they have owned but rented out for 25 years.

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A. Great question! First, let me just run through how capital gains tax works.

This tax is charged on all assets that appreciate in value over time. This includes property but also applies to stocks, artwork, even collectibles. The estate or the seller is responsible for paying the tax once the asset is disposed of and that can include the sale of the asset or the gifting or giving of the asset. Capital gains tax is calculated by taking half of the appreciated earnings and charging the asset-owners’ marginal tax rate. What does this mean? It means that when making decisions about selling capital assets it’s best to try and time the sale of these assets in years when income is lower. Why? Because the more income you earn, the higher your marginal tax rate and that means you’ll pay more capital gains tax in those years.

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When you make money from selling a house or property , your capital gains tax depends on whether you lived in the house and how long you lived there. By renting out the property for another 2.5 years, you’d reach capital gains tax exemption. But be sure to keep your rental stint under three

However, I have a rental that I kept for five years and now have a capital gain of 0,000. The depreciation you have claimed over the past five years is subject to “recapture rules,” which means you report some of the gain when you sell the property at ordinary income tax rates and some of the

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OK, now that we are clear on the basics of capital gains tax, let’s get down to the heart of your inquiry: When is the best time to transfer the asset from parents to their chosen heir?

Quite often, this decision is clouded by an overwhelming desire to avoid probate tax. In Canada, there is no estate or inheritance tax. However, there are probate fees. These fees—often misinterpreted as taxes—are administered by the provincial courts. They pay for the standard court services that help verify and legally transfer a person’s estate to a chosen heir (and certain assets are exempt, such as property held as joint tenants or registered accounts with designated beneficiaries).

In the grand scheme of things, probate fees are relatively small. For instance, if your parents lived and died in Ontario as the executor of their estate, you would be responsible for paying probate fees of $250 plus $15 for every additional $1,000. This would result in forking out less than $13,585 to cover inherited assets worth $250,000.

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Depreciation is an income tax deduction that enables rental property owners to recover their costs. Homeowners get a big tax break when they sell : A capital gains tax exclusion.

Capital Gains Savings When Selling Your Home. 5. Limit the Rental Use of Your Home. There are multiple tax -saving strategies that work particularly well for investments like stocks, bonds, retirement funds, and rental properties .

Yet, probate fees aren’t the only factor to consider. When an entire estate is left to an heir the final tax bill can be quite significant. All unregistered assets in all accounts are considered to be sold and the final sum of all these assets is then taxed, typically at the highest marginal tax rate. One option is to transfer ownership of the property to an heir before parents die. This means the deemed disposition (the taxman’s way of saying you basically “sold” the property to your heir) of the property is taxed using their current capital gains marginal tax rate. To illustrate, let’s assume your parents earn about $75,000 in annual household income (money from government plans, small pensions, and rental income). Their marginal tax rate is 31.48% (if they lived in Ontario), which means they’d pay 15.74% in capital gains tax (half their marginal rate). Wait until they pass away and the entire value of their estate pushes the marginal tax rate up to 53.53%, meaning you’d have to pay close to double, or 26.76%, in capital gains tax.

It’s one reason why parents often choose to transfer ownership of the property to their heirs before their death. That said, your assumption is correct: You must use the property’s fair market value. The CRA defines FMV as “the highest dollar value you can get for your property in an open and unrestricted market, between a willing buyer and a willing seller who are acting independently of each other.” Even if you end up paying less than FMV for the property, your parents will still be required to pay capital gains tax on the profit of the rental property using the FMV.

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This means that if the property lost money and you used the loss against your tax bill in previous years, you will have a larger tax bill when the sale goes through. Example – Capital Gains Tax and Depreciation. Let's say you have a rental property that you bought for 0,000 and it sells for 0

Worried about paying capital gains tax ? Find out how to avoid paying this tax when you sell your investment property . And while you won't make a rental income if you go down this path, all profits made from the renovation are exempt from CGT .

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MORE ABOUT ASK A REAL ESTATE EXPERT:

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  • Reporting the sale of a rental property
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  • Avoid paying tax on the sale of land

Andy Yan, the analyst who exposed Vancouver’s real estate disaster .
Hated by politicians, speculators and money-launderers, Andy Yan’s data on Vancouver housing has earned him the right to say, ‘I told you so’Nowadays he’s the director of the City Program at Simon Fraser University, and while he’s too modest to boast about it, along the way he’s picked up a couple of exceedingly rare civic distinctions.

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