What Are the Financial Tax Implications of Owning Vacation Property?
If you own a principle residence and own a vacation property, there will be tax implications that you need to be aware of when you decide to sell. As well, there are tax implications for the individuals who inherit your vacation property should you pass away or when you gift property.
What are Capital Gains?
Capital gains are what tax payers must pay as personal income tax upon the sale of property that is not considered their primary residence. Capital gains are currently calculated at 50% of the increase in value from the time of purchase.
Capital Gains is calculated by: Sale price A - Purchase Price B = Capital Gain C x 50%
What is The Adjusted Cost Base?
The Adjusted Cost Base or ACB is the cost of any improvements made to the property that can be deducted from the income tax liability or Capital Gain from the sale of the property. For example, the ACB considers the costs incurred by the home owner, when they build new structures, pave the driveway, put in a new septic system or renovate the home. The higher the ACB (costs), the lower the capital gain. It is important for the home owner to retain all receipts and evidence of these expenses for the Canada Revenue Agency should they ask for it.
The ACB is calculated by:
Sale price A - Original Purchase Price B - Expenses Incurred C = Total Capital Gain D x 50%
What is My Principle or Secondary Residence?
Generally speaking, most individuals claim their principle residence as where they live and reside most of the time, not where they go to vacation. However, home owners could claim their vacation home as their primary residence if they so choose, as a tax shelter if they plan on selling and reinvesting into another vacation home. In this instance, their home in the city where they predominantly reside is deemed as their secondary residence.
Additionally, married or common law couples cannot individually claim the vacation home has their principle residence and the other the second home as their principle residence as they equally share both the principle and secondary residences.
Tax Implications to Gifting or Inheritance of Vacation Property
If the home owner gifts their vacation property, they are still responsible for the tax liability as if it were sold at current fair market value, although no funds were exchanged. The home owner must be aware of this before gifting property, and perhaps come to an agreement with the receiver of the property to pay the tax liability.
Upon the home owners death, and the property is inherited by a surviving child for instance, the tax liability of the capital gain is calculated on the current fair market value and payable out of the estate of the deceased. If there are no funds in the estate of the deceased, and the individual who inherited the property does not have the funds to pay the tax liability, the property must be sold in order to pay the tax.
It is recommended that you speak with your accountant to ensure the best option for you and your family!