Topic: How To Invest

Capital gains exemption and real estate investing

Learn about capital gains exemption and REITs for real estate investing

Owning your house is a great tax shelter. That’s because gains on your principal residence involve a capital gains exemption. Note, though, that this benefit only applies to your principal residence. You must still pay tax on gains on the sale of a recreational property such as a cottage or a ski chalet. But these properties generally appreciate at a much slower rate than, say, a home in a major urban centre.

We continue to believe that ownership of a primary residence is all the real estate exposure most investors need. However, if you want to add to your real estate holdings, one good way to do it is through real estate investment trusts, or REITs.


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Capital gains exemption: Making an adult child co-owner of your home or portfolio can have hidden taxable capital gains consequences

If you have capital gains on your portfolio, you are only liable for capital gains taxes when you sell. But if you put your son or daughter on as a co-owner, the Canada Revenue Agency could interpret that as a “deemed disposition” —a sale, in other words—of half the portfolio. That would leave you liable for capital gains tax this year, rather than deferring those gains until you sell or die.

When you die, you are deemed to have disposed of or sold your entire portfolio. But no matter how old you are, that day can still be years in the future. It’s a waste to pay capital gains tax any sooner than you have to. Worse, your stocks may have gone down by the time you die. The gain on which you’ve already paid taxes may have evaporated!

You won’t have this exact problem if you put an adult child on as co-owner of your home, since your principal residence experiences capital gains exemption. But each of us can only have one principal-residence capital-gains-tax exemption. If your adult child already owns a home, then any gains he or she makes on your home, after becoming joint owner, will be taxable.

In this case, putting your adult child on as co-owner of your home could convert some tax-free capital gains (in your hands) into taxable capital gains (in your child’s hands).

REITs can kick start your real estate investing in Canada

Real estate investment trusts invest in income-producing real estate such as office buildings and hotels. That’s a segment of the market that is difficult for most investors to access through direct ownership of property. Moreover, real estate investment trusts, REITs, save you the cost, work and risk of owning investment property yourself.

The best real estate investment trusts have good management and balance sheets strong enough to weather an economic downturn. They also have high-quality tenants, and they carefully match their debt obligations with income from their leases. The best ones still do well despite an economic slowdown, and they take advantage of low interest rates to refinance long-term mortgages.

Outside of REITs, if you’re investing in real estate primarily for profit, you should look at multiple-unit rental housing or commercial properties, especially those with big parking lots or extra land. Investments like these can give you current income, plus long-term development possibilities. That’s a potent combination for patient investors. And of course, location is the most crucial part when it comes to real estate investing in Canada or any country.

Calculating your capital gains tax

To calculate your total capital gain on a share you sold during 2020, you’ll have to subtract the adjusted cost base of the shares you sold from the total proceeds of the sale. The adjusted cost base of the shares is equal to the cost of the shares plus any costs associated with owning them, such as brokerage commissions.

Capital gains exemption: Make sure you claim all of your deductions against taxable capital gains

Commissions and brokers’ fees aren’t the only expenses you can deduct when you sell your capital property. You can deduct many other outlays and expenses that you incur to sell your property, including fixing-up expenses, finder’s fees, surveyor’s fees, legal fees, transfer taxes and advertising costs. To ensure that you claim all of the deductions you can, and do so correctly, we advise that you consult a knowledgeable tax professional.

Should baby boomers sell their homes early in order to help their adult children buy their own homes?

This post was originally published in 2010 and is regularly updated.

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