If you’re investing in real estate, it’s important to be aware of the potential tax implications. One tax that may affect you as a real estate investor in Ontario is the capital gains tax. This is the tax you pay on the profit you make when you sell a property. However, there are some capital gains tax exemptions that may be available to you as a real estate investor.
What is the Capital Gains Tax?
The capital gains tax is a tax on the profit you make when you sell an asset, such as a piece of real estate. It’s based on the difference between the purchase price and the selling price of the asset. For example, if you buy a property for $500,000 and sell it for $750,000, you would have a capital gain of $250,000. This $250,000 would be subject to the capital gains tax.
Capital Gains Tax Exemptions for Real Estate Investors in Ontario
As a real estate investor in Ontario, there are some capital gains tax exemptions that may be available to you. These exemptions can help reduce or eliminate the amount of capital gains tax you owe.
- Principal Residence Exemption
If you sell your principal residence, you may be able to claim the principal residence exemption. This exemption allows you to avoid paying capital gains tax on the profit you make when you sell your home. To be eligible for this exemption, the property must have been your principal residence for every year that you owned it.
- Small Business Exemption
If you own a small business, you may be able to claim the small business exemption. This exemption allows you to avoid paying capital gains tax on the sale of shares of a qualifying small business corporation (QSBC). To be eligible for this exemption, the shares must have been held for at least two years and meet certain other criteria.
- Lifetime Capital Gains Exemption
The lifetime capital gains exemption allows you to avoid paying capital gains tax on the sale of qualified property, including shares of a QSBC and farm or fishing property. The maximum exemption amount for 2021 is $892,218. To be eligible for this exemption, you must meet certain criteria, such as owning the property for at least two years.
- Capital Gains Reserve
If you sell a property and receive payments over time, you may be able to use the capital gains reserve to defer paying the capital gains tax. This allows you to spread out the tax payments over several years, which can be helpful for managing your cash flow.
Conclusion
As a real estate investor in Ontario, it’s important to understand the capital gains tax and the potential exemptions that may be available to you. The principal residence exemption, small business exemption, lifetime capital gains exemption, and capital gains reserve are all options that may help reduce or eliminate the amount of capital gains tax you owe. Be sure to speak with a tax professional for more information on these exemptions and how they may apply to your specific situation.