Calculating the capital gain on a rental property involves determining the difference between the property’s sale price and its adjusted cost basis. Here’s how you can calculate it:
- Determine the Sale Price: The sale price is the amount for which you sell the rental property.
- Calculate the Adjusted Cost Basis:
- Start with the original purchase price of the property.
- Add any closing costs associated with the purchase, such as legal fees, title insurance, and transfer taxes.
- Include the cost of any significant improvements or renovations made to the property during the period of ownership. Note that regular repairs and maintenance are not included in the cost basis.
- Subtract any accumulated depreciation claimed over the years. This is important because depreciation reduces your cost basis for tax purposes.
- Subtract the Adjusted Cost Basis from the Sale Price: This calculation gives you the capital gain on the rental property.
Capital Gain = Sale Price – Adjusted Cost Basis
Tax Considerations:
- In Canada, only 50% of the capital gain is taxable. This means you’ll include half of the capital gain in your taxable income for the year of sale.
- However, if the property was your principal residence for any part of the time you owned it, you may be eligible for the Principal Residence Exemption (PRE), which could exempt some or all of the capital gain from taxation.
- If the property was not your principal residence, the capital gain is added to your income for the year of sale and taxed at your marginal tax rate.
Reporting: Report the capital gain on your income tax return for the year in which you sold the property. Use Schedule 3, Capital Gains (or Losses), to calculate and report the capital gain to the Canada Revenue Agency (CRA).
Consultation: It’s advisable to consult with a tax professional or accountant familiar with Canadian tax laws to ensure accurate calculation and compliance with tax regulations, especially considering factors like the Principal Residence Exemption and any other applicable deductions or credits.
Tags: Capital Gain Calculation
