Tax on the Sale of Investment Property

A client will often ask us “How much tax will I have to pay if I sell my investment property?” The obvious answer is “It depends.”

First of all, it depends upon the cost base or adjusted cost base (“ACB”) of the property. Second, it will depend on your marginal tax rate.

The ACB is the price paid for the property plus any costs associated with improvements to the property of a capital nature.

For example, if you purchased a cabin at Silverstar Mountain for $200,000 and you sell it for $300,000, there is a $100,000 capital gain.

The Income Tax Act allows for a 50% inclusion rate when accounting for capital gain income. Therefore, only $50,000 (or 50% of the $100,000 gain) would be taxable.

Finally, you will pay tax on the $50,000 based on your marginal tax rate. If you are already in the highest marginal tax rate of 43.7% (your income exceeds $120,000 per year – based on 2006 tax rates), you would pay $21,850 in tax. This amounts to about 22% tax on the $100,000 gain.

It is important to point out the if you are in the ‘business’ of buying and selling properties, the Canada Revenue Agency “(CRA”) will likely tax your capital gain income as regular business income, which has a 100% inclusion rate. In this situation, using the example above, tax on the $100,000 gain would be $43,700 or 43.7%.

Most individuals who buy and sell a few pieces of property over the years need not worry about being in the ‘business’ of buying and selling properties.

For more information on how much tax you will owe if you sell your investment property please give us a call.

NOTE: The Shannon & Company 'Tips' are NOT intended to cover all tax issues. You should talk to your Shannon & Company professional before making any decisions regarding the information found here.


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