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| *The Commerce Journal>>>Canada Taxes |
Capital gains taxes? |
Hi, ok I am purchasing a house with the intent to rent it out to students. Once i sell the house I realize that I will pay capital gains taxes. Say the house is 180 000 when i bought it and i sell it for 200 000. If i put down 20k and over the course of 5-7 years pay off the mortgage I will only be paying capital gains on the 20 000 increase? or the increase from my original 20k to the 200k sale? Also, is there any way to avoid paying capital gains? ie. personal house, live in it for a year after renting...THANKS! Here's how it works. When you purchase the property for 180K, that is your basis. You will be able to depreciate the property over a certain period of time (I can't remember if it's 25 or 30 years, but you can find out on IRS.gov). Say that the usefull life is 30 years, and you want to depreicate 6k a year (straight line only for real property), you can take that 6k and offset it against your profits. IE, if you made $9k in rents, you will only pay income tax on $3k for the rents. Each year, your property tax basis will decrease by 6k. So at the end of year one, your basis will be 172K. Year 2, 166K, and so on. When you go to sell, you will pay capital gains tax on the difference of what you sell it for (net of any fee's), and what your basis is. As mentioned above, there are ways to defer paying capital gains tax through reinvestment methods. I recommend getting a good CPA and they will take care of all the complicated tax implications. My only recommendation is to keep receipts for EVERYTHING. That $2 lightbulb that you had to replace is an expense, and can lower your income. Again, get a good tax accountant to help you come tax time, just keep good records and it should be very profitable. One note is that you can always opt to not take depreciation. Your accountant should be able to figure out the most beneficial plan for the property. If you don't take depreciation, your basis would stay at 180k, and if you sold it for 200K, you would only owe capital gains tax on the 20K of income. Regards Source(s): CPA/Accountant As an accountant I can only say that you are in trouble. Go see a CPA. I can tell you right now that a CPA will save you whatever tax you think you might have to pay and then some. It's obvious by your question that you need a CPA. I'm sorry that I'm not polite, only right! you can avoid capital gains taxes by reinvesting. By doing a 1031 exchange you can actually avoid paying capital gains taxes for a lifetime and it's actually legal. :) In Canada, as long as you live in the house and it is your principle residence, you should not have to pay capital gains taxes on the sale. This is assuming you only have 1 residence. You can deduct rental expenses and mortgage interest based on the square footage of the rented rooms. If however you deduct depreciation, you will have to pay the tax savings back when you sell the house for a gain and then CRA may decide that it is a rental property and nail you with capital gains. So in short, sole principle residence - no capital gains unlike in the US where capital gains on homes is taxable. |
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