Starting June 25, 2024, the federal budget will bring some changes to the capital gains tax rules. Right now, when you sell an asset, like a rental property or a cottage, only half of the capital gain is taxable. But come June, for gains over $250,000, two-thirds will be taxable. And if you own a trust or corporation, this new two-thirds rule will apply to all gains, no exceptions.
So, what does this mean for you? If you’re sitting on some substantial unrealized gains, it might be time to consider your options. Let’s break it down.
Should You Sell Now?
If you’re expecting a significant profit from selling a property – say, more than $250,000 – you might want to act before the new rules kick in. For example, if you’re looking at a $600,000 profit, right now only $125,000 of the first $250,000 would be taxable, and $175,000 of the remaining $350,000. But under the new rules, $233,450 of that remaining amount will be taxable, which could mean paying an extra $30,000 in taxes if you’re in the top tax bracket. Ouch!
However, selling just to save on taxes isn’t always the best move. There are other factors to consider.
When Not to Sell
If you’re not already planning to sell, the tax changes alone shouldn’t push you into a decision. There’s more to think about – like how much you enjoy your property, future appreciation in value, and your overall financial plan. As Peter Guay from PWL Capital Inc. wisely points out, “There are too many other considerations to let tax be the sole driver of the decision.”
Considering a Family Transfer?
If you’ve been thinking about passing your property to your children or grandchildren, now might be a good time to do it. This can help manage future tax liabilities, but it’s crucial to analyze how best to use your principal residence exemption between properties. You can only designate one property as your principal residence for specific time periods, and this requires careful planning and valuation.
What About Using a Trust?
Some folks consider moving their properties into a trust for succession planning. This can be a good move if you’re certain your family wants to keep the property for generations. But remember, setting up and maintaining a trust can be complicated and comes with its own set of rules and tax implications. Trusts created during your lifetime have a 21-year lifespan before any gains would be taxed if left in the trust, so it’s not a decision to take lightly.
Splitting Up the Sale
If you have a buyer lined up and are worried about a hefty tax bill, you might consider spreading the sale proceeds over a few years. This is known as a capital-gains reserve, allowing you to report the income from the sale over up to five years. This can ease the tax burden, but it’s only an option for cash sales, not transfers to family members.
Final Thoughts
Deciding whether to sell now or hold onto your property involves a lot more than just potential tax savings. It’s about balancing your financial goals, lifestyle preferences, and long-term plans. If you’re unsure about what’s best for your situation, it’s always a good idea to consult with a financial advisor or tax expert who can help you navigate these changes.
Remember, we’re here to help you with all your real estate needs. Whether you’re thinking about buying, selling, or just want to chat about the market, don’t hesitate to reach out. Stay informed and make the decision that’s right for you!
Happy house hunting and selling, GTA!
Note: This blog post is for informational purposes only and does not constitute financial or tax advice. Always consult with a professional advisor for your specific situation.
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