While at dinner recently, a friend of mine, Carla, informed me that she sold her rental property and was curious about the amount of tax that she would owe on the gain. Upon further questioning, I uncovered that, in the past, my friend had lived in this rental property (a condo) for many years. She purchased a second condo a few years back and moved into it. She had then rented out the first condo—the one she just sold.
From her line of questioning, I realized that, other than the tax exemption on the sale of the current principal residence, many taxpayers are totally unaware of the many nuances and tax laws (many in their favor) surrounding the sale of real estate. I will not go into all the tax laws regarding sale of real estate, but I will consider the rules that affect Carla’s sale of the rental property.
Vancouver Sale of Rental Properties – BC Tax Laws
Let’s call the condo that just sold Home1. The fact that Home1 was a rental property the last few years, prior to its sale in 2017, does not mean the gains are entirely taxable. The fact that Carla lived in that condo from purchase date to spring of 2012 means gains up to 2012 can be sheltered under the principal residence exemption. But there is another, less-known, rule in the ITA that allows the taxpayer to make an election to add another four years of principal residence to Home1. What this means is that Carla can elect to designate the rental property as her principal residence up to 2016 and shelter a larger portion of the gain using the principal residence exemption.
Why would Carla not elect to add another four years to the principal residence exemption? The trade off in adding four years to Home1 is that Carla would not have the option to designate the condo she is now living in (Home2) as the principal residence for those same four years. The consequence would be that when Home2—which was purchased in 2012—is eventually sold, 2013 to 2016 would not be available for the exemption.
How should Carla make the decision? Many would answer that the dollar value of the gain thus far on both condos would be the main factor in the decision process. I think another important deciding factor is that Carla is in her mid-50s. If Home2 is where she will stay permanently, why would she save the four-years’ worth of exemption for the future sale of Home2? Chances are it’s her estate that will have to deal with Home2 gains. So why pay more taxes on Home1 gains now, if you can just shelter more of it? This would be my decision, even if the gain on Home2 is greater.
Consult a Vancouver Professional Rental Property Tax Advisor to Help You!
The story above is just one example of how nuanced the principal residence tax rules are. Given the size of the gains, professional tax advice is a must.