Q. How do I calculate the capital gain on real estate sold in Ontario? I’m trying to figure out how much I should list my main resident property for—after deducting all expenses (interest, fees, taxes)—to arrive at a reasonable profit margin. Is there a tool or app that can do that? I searched the internet and couldn’t find any articles explaining this process.
A. Thanks for your question, Yan. There are a couple of different issues at play here, so I’ll start by clarifying a few points about capital gains, and then explain how I would approach a target sale price for real estate, as well as for other investments.
First off, since you refer to your “main resident property,” I want to be clear that the profit you earn on the sale of a property—called a capital gain—is exempt from income tax when that property is your principal residence. A principal residence can be a house, condo, cottage, or other property that you own and occupy. There may be limitations to this exemption, such as if the property is larger than 1.24 acres, if you owned and sold other real estate during the same period, or if you rented out the property to tenants. You can have only one designated principal residence at a time.
Assuming this property qualifies as your principal residence, you will not pay any capital gains tax when you sell it. But you still need to report the details of the sale when you file your taxes—a change that was introduced in 2016. This applies not just to your property in Ontario, Yan, but to principal residences in other provinces and territories as well.
The information goes on Schedule 3 of your income tax return, on accompanying Form T2091 (or T1255 for a taxpayer who died in that tax year). You report the proceeds of disposition (the amount you sold the property for); your outlays and expenses related to the disposition (any real estate commissions and legal fees you paid); your adjusted cost base (what you paid for the property plus some additional expenses—more on this below); the years you owned the property; and the years you are declaring it as your principal residence.
Calculating the capital gain
To determine the capital gain on the sale of a property, you subtract your adjusted cost base (ACB) from the net proceeds of the sale. The ACB generally includes:
- What you paid for the property (sale price)
- Land transfer taxes
- Legal fees upon purchase
- Any capital costs, such as renovations, additions, or improvements to the property, that you paid for throughout the years of ownership
Mortgage interest and property taxes are typically not added to your adjusted cost base. One exception may be for a property that is “flipped”—i.e., purchased, renovated, and sold for a profit. Otherwise, these expenses are considered personal costs of ownership. (In the case of a rental property, however, you can deduct interest and property taxes annually from your taxable rental income.)
The net proceeds on the sale of a property are more straightforward: that’s the amount you sold the property for, minus any real estate commissions or legal fees you paid on the sale.