They say the two happiest days spent in a vacation home are the day it's purchased and the day it's sold. While deciding that it's time to sell a vacation home can be a relief in many ways, there are also a few factors that need attention for a smooth sale with no surprises. Top among these are the tax considerations of the sale. Knowing what to expect in advance when selling a home can help avoid unexpected tax issues later on.
Is It a Primary or Secondary Residence?
In Canada, a family can typically only consider one residence their primary residence. In most cases, this will be the place where the owners spend at least half of the year. Other qualifications may apply based on specific city and province laws. A tax lawyer can help individuals decide which home should be considered the primary residence at the time of a sale and what the tax implications of that choice will be.
Capital Gains Taxes
Canadian citizens who are selling any property that is not considered their primary residence will incur capital gains taxes at the time of the sale. Conversations with a qualified tax attorney can help sellers understand how much they will owe and whether any shelters are available in their situation.
In most cases, taxes apply to the difference between the amount the seller receives and the original cost of the property. Sellers should also hold onto receipts for additions or improvements to a vacation property. These costs can be put toward the cost of the home. This, in turn, reduces the eventual profit and, by extension, the capital gains taxes that are owed at the time of sale.
Foreign Sellers' Obligations
Even those who are not Canadian citizens may have some tax implications linked to the sale of a vacation home in Canada. US citizens, for instance, must pay 10% to the IRS at the time of the sale under the Real Property Tax Act. Citizens of other countries may have obligations in their home countries, as well. It is also worth investigating exemptions. In some cases, tax treaties include either partial or total exemptions from taxes on property sales.
Does Goods and Service Tax Apply to the Sale?
When selling a home, many people worry that the country's Goods and Service Tax (GST) could apply to the sale. This tax can be especially worrisome for motivated sellers, as it could add a much as 15% to a prospective buyer's costs.
However, most sellers and buyers do not have to worry about GST during the transfer of a vacation home. The GST only applies to vacation home sales in a very limited number of circumstances. For instance, a home must be considered a commercial property. It must also be used commercially 50% of the year or be actively rented out 50% of the year.
Those who primarily rent out their vacation home should let buyers know that GST could apply. This way, a buyer will enter into the decision with full information and will not be surprised by a tax bill later on.
A little research now can help avoid a lot of headaches later on. By looking into the tax implications early in the sale process of a Dickinsfield home, a seller can be sure that every situation has been considered to reduce their tax burden and to ensure that all potential outcomes are covered.