February 5th, 2024 | Selling
How Are Toronto Home Sellers Taxed?
Taxation is an expected facet of owning real estate in Toronto. From municipal and provincial land transfer taxes to annual property taxes, income tax on rental properties, and more, the costs of owning a home go far beyond the initial purchase price.
While there are myriad resources outlining the various degrees of taxation applied to a home purchase, one of the lesser-discussed elements of homeownership is the taxes that apply during a sale.
Like buyers, who face their own avenues of taxation, implications for sellers are diverse and dependent on a number of variables. However, there are certain misconceptions about which home sellers are taxed – and to what extent. Ultimately, property sellers in Toronto should remain aware of potential taxation (and other transactional costs) ahead of the market to account for their final returns.
Taxation on Principal Residences
Speaking generally, most homeowners in Toronto are not subject to significant taxation when their home is sold. While some sellers are required to pay a capital gains tax – which applies to the appreciation in property value between the time it was first purchased and the sale, there are only specific instances where this applies.
In Toronto, you will not be required to pay capital gains tax if the property sold was your principal residence.
Principal Residence Criteria
The Canadian Revenue Agency (CRA) outlines the following criteria for which homes qualify as a principal residence.
- It is a housing unit, a leasehold interest in a housing unit, or a share of the capital stock of a co-operative housing corporation you acquire only to get the right to inhabit a housing unit owned by that corporation
- You own the property alone or jointly with another person
- You, your current or former spouse or common-law partner, or any of your children lived in it at some time during the year
- You designate the property as your principal residence
Note, a property must meet all four of these characteristics in order to qualify as a principal residence.
Wish to achieve a smooth and lucrative home sale? Explore the following blog posts for expert-penned guidance.
- The Critical Nature of Pricing in Today’s Market
- Refined Strategies to Enhance Your Home’s Value
- How to Effectively Prepare Your Home For Sale
Capital Gains Tax on Investment Properties
While capital gains tax does not apply to principal residences, it will apply to the sale of other types of real estate such as rental properties, vacation homes, and other investment assets.
For sales in which capital gains tax applies, sellers only face taxation on 50% of the profits earned by appreciation. As an example, if a home was purchased for $1,500,000 and sold for 2,000,000, the seller would only face taxation on $250,000.
Implications for Inherited Properties
In addition to properties sold by the origin owner, capital gains tax can also apply to the sale of homes that are inherited. However, these taxes are calculated and collected differently based on property usage and type.
In the instance that a beneficiary inherits a property that was used as a primary residence, capital gains tax applies once the home has been formally sold. The seller is then required to report 50% of the general capital gains on their next income tax statement.
For dedicated vacation or investment properties, full capital gains taxation occurs at the time of inheritance. If the beneficiary who sells the property is unable to make this payment upfront, the value can be deducted from the estate of the deceased.
Please note that selling an inherited property is incredibly intricate. Given the complex nature of these transactions, seeking personalized and encompassing guidance from a real estate professional is advised before proceeding with a listing process.
Seeking more refined guidance on real estate inheritance? Explore these other resources from our blog.
Upon Sale: Retaining Your Returns
Following a real estate transaction, taxation is not always flexible. However, there are strategies for reducing financial penalties depending on your circumstances. Taking this into account, minimizing potential pitfalls is best accomplished by working with a real estate agent who has experience with a wide range of property sales and generational asset transfers – such as Armin Group.
Whether you are looking to sell your long-held home, transfer a property to a loved one, or sell an inherited property, we can guide you through a seamless process that ensures your interests and bottom line are fiercely protected.
Seeking sophisticated real estate guidance? Armin Group can help. Send us an email or call our team at 416-347-4061 to begin your journey.
