Three ways to save on capital gains tax when selling a secondary property.
March 24, 2023
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The principal residence exemption allows Canadians to sell their primary home without paying tax on the profit. For people with multiple properties, they can strategically split the exemption between their homes to lessen their tax burden.
Choosing which properties you want to be exempt comes down to math, says Cindy Marques, a certified financial planner and director of financial planning at Open Access Ltd.
"Whether you're selling the cottage or you're selling the actual house, you might want to consider, what did I buy both of these properties for, and how much did they appreciate up until this date?" she said.
If you're selling the cottage and you don't want to deal with a large tax bill now, you could designate it as your principal residence for all or some of the years, so that the taxable gain is entirely exempted or significantly reduced, she says.
The caveat is the actual home will not be eligible for the principal residence exemption during those years.
Life insurance is also a factor to consider, she says, because it can deal with an individual's final tax bill upon death.
If you don't have life insurance and don't want a large tax bill eating into your estate upon death, it's probably best to save the principal residence exemption for your actual house, she says. However, if a life insurance payout is going to cover most or all of your estate's tax liability, then you can designate the secondary property as your principal residence to maximize the profit on the sale immediately.
"It's a matter of choosing, do I want to prioritize my cash flow today or down the line?" Marques says.
She notes a rental property or renting a portion of your home can complicate matters because the principal residence exemption is not applicable or otherwise pro-rated to the part of the home that's not used as a rental, depending on the owner's unique situation.