5 Things to Know About Capital Gains
So, you bought your property for $400,000 and are selling it for a cool $500,000. Wondering what your capital gain is? If your guess is $100,000, you’re pretty close… But it’s not all money in your pocket. The capital gain, which is the amount of money you earn when your property value goes up between the date you bought it and the time it sold, needs to be reported on your tax return. Forgetting to loop in the Canada Revenue Agency (CRA) of a capital gain can be costly, so we’re helping you stay in the clear with these 5 tips.
1.Know how capital gains are taxed
Luckily, it’s pretty straightforward. If you have capital gains on any properties, 50% of that gain is taxable. That 50% is added to your income, and then your personal tax rate is applied to the total. So, the amount of tax you pay on a capital gain depends on your annual income. The higher your tax bracket, the more tax you will pay on your capital gains.
2.Keep good records
When declaring capital gains, documents related to the acquisition and disposition are a must-have. This can feel a bit like herding cats, because info like the date of acquisition, purchase price, commissions and any other relevant expenses are usually on multiple documents, so you’ll have a few papers to keep track of. While it’s easier said than done, having your documents in order will save you when it’s time to file.
3.Determine if your gain is a sale or gift
Think you might avoid taxes on your capital gain by giving your property away? Unfortunately, it doesn’t quite work like that. Gifting your property or even selling it at a cut-rate price is still considered selling it. If you sell for a low price, the CRA will use the Fair Market Value (FMV) of the property to determine whether or not you’ve realized a capital gain. If a property is gifted, the recipient’s cost is bumped to the FMV and the donor’s capital gain or loss depends on the FMV of the property. The exception here is gifts between spouses, which are usually tax-free.
4.Plan for your gain
Capital gains can hit hard at tax time. If you know you’re going to sell your property for more than you bought it, there are other ways minimize your tax bill. Selling some losing stock could balance things out or create a capital loss. Or, if your income happens to fluctuate, you could claim a capital gain in a year when your income is lower than usual.
5.Remember, capital gains aren’t just on property
Even though we usually think of real estate when we’re talking capital gains, they include sales from any capital asset, like a stock or bond. So when tax time rolls around, be sure to consider any capital asset you have sold, and how it might impact you.
Although they take some time to claim, and the government keeps their hands on a portion of it, a capital gain does mean you’ve got some extra income! Not the worst problem to have. Just make sure you understand how it will impact your finances overall, so you won’t be facing any surprises when it comes time to file.