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A Complete Guide to Capital Gains Tax on Real Estate Sales

Dana George has a BA in Management and Organization Development from Spring Arbor University. For more than 25 years, she has written and reported on business and finance, and she's still passionate about her work. Dana and her husband recently moved to Champaign, Illinois, home of the Fighting Illini. And though she finds the color orange unflattering on most people, she thinks they'll enjoy Champaign tremendously.

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Margo Winton Parodi is a freelance copyeditor who has worked on a wide range of subjects, from cookbooks to young adult novels to personal finance. She received her BA in Communications from UC San Diego in 2010 and her Copyediting Certificate from UC Berkeley Extension in 2015. She's been contributing to The Ascent since the spring of 2019.

When you sell an asset for more than it cost you to acquire it, the difference is known as a capital gain. For example, if you paid $1,000 to buy stock and sell the same stock for $1,200 (net of expenses), you have a capital gain of $200.

In most, but not all situations, the profits you make upon the profitable sale of an asset are taxable. Since it is a tax being applied to a capital gain, it is appropriately known as a capital gains tax. In this article, we'll discuss the two main types of capital gains, how each one is taxed, and some real-estate-specific rules you need to know.

If you're a higher-income taxpayer, you may have to pay an additonal 3.8% net investment income tax .

However, if you held the asset for a year or less before you sold it, any net profit will be considered a short-term capital gain, which is taxable as ordinary income. For example, if you're in the 22% tax bracket, that's the rate you'll pay on short-term gains.

Capital gains tax on a primary residence

If you sell your primary home, it could be entitled to special treatment, even if the sale gave you a six-figure profit. However, it's not as simple as selling a home you live in. To get the primary residence exclusion, you need to meet two conditions:

• You need to have owned the home for at least two out of the previous five years.
• You need to have lived in the home as your primary residence for at least two of the previous five years.

You don't have to live in the home for two consecutive years, but a minimum of two years out of the last five. And you can only use the exclusion once every two years. In other words, if you buy a home and sell it a year later, you can't use the exclusion, regardless of whether it was your primary home during your ownership.

If you qualify, the primary residence exclusion can exempt as much as $500,000 of net profit from capital gains tax for married couples filing jointly, or $250,000 for all other taxpayers. So if your cost basis on your home that you own jointly with your spouse is $400,000 and you eventually sell it for $900,000, the IRS can't touch a penny of your gains. It's only when you exceed $500,000 in net profit that the proceeds will be taxed.

Furthermore, because there's a minimum two-year ownership period used to define a primary residence, any capital gains you owe on such a sale are long-term capital gains.

Cost basis 101

Before we go any further, it's important to mention the concept of cost basis since it's used to determine your potential tax liability.

In a nutshell, your cost basis in a property can include three components:

• The purchase price of the property.
• Certain acquisition-related expenses, such as legal fees and transfer taxes.
• Property improvements that add value to the property or extend its useful life (but not maintenance or necessary repairs).

As a basic example, if you acquire a property for a $200,000 purchase price, pay $5,000 in acquisition expenses, and spend $20,000 to renovate the kitchen, your cost basis will be $225,000.

Let's say you receive a job transfer and must sell your home 10 months after buying it. If you manage to sell it for more than you bought it for, you can reduce that profit by the amount it cost to acquire the home, plus any improvements you made that added value during the 10 months you were there. Depending on those two expenses, you may even avoid paying short-term gains.

Capital gains tax on a second home

A second home is generally defined as a property that you live in for part of the year, and that isn't primarily a rental property. For example, if you have a condo at the beach that you live in for two months every summer and also rent out for a month during the summer season, it is likely considered to be a second home.

You may own more than one property that meets the definition of a "second home." For example, if you have a beach condo and mountain cabin that you live in at certain times during the year, but you also maintain a primary residence, both properties can be considered second homes for tax purposes.

Since a second home doesn't meet the IRS definition of a primary residence, it is not entitled to the capital gains exclusion. In a nutshell, any net capital gain you make upon the sale of a second home is taxable at the appropriate rate (long term or short term).

Capital gains tax on an investment property

After the sale of an investment property, there are two types of tax that you may face.

First, if you sell the property for a net profit relative to your cost basis, you'll have to pay capital gains tax.

In addition, if you've claimed depreciation expenses on the property during your holding period (this is always the case with rental properties), the cumulative amount you've deducted will be considered taxable income when you sell. This concept is known as depreciation recapture. In essence, it's the government recapturing the savings you enjoyed due to the depreciation deduction.

Consider this example. Let's say that your cost basis in a duplex is $250,000 and that you've owned it for 10 years. Over the 10-year ownership period, you've claimed a total of $90,900 in depreciation expense. If you sell the property now for net proceeds of $350,000, you'll owe long-term capital gains tax on your $100,000 net profit plus depreciation recapture on $90,900, which is taxed at your marginal tax rate.

Avoiding capital gains tax on investment properties

As you can see, selling an investment property -- especially one you've held for a long time -- can result in quite a hefty tax bill.

Fortunately, there's a way to avoid paying both capital gains and depreciation recapture taxes, at least for a while. This is known as a 1031 exchange, and while there are several important rules and procedures that must be followed, the basic idea is that as long as you use all of the proceeds from the sale of your investment property to acquire another investment property, you can defer taxes until the eventual sale of the replacement property.

When in doubt, ask for help

As a final point, it's important to emphasize that there is no way we can cover every potential real estate sale situation in this article, and there's admittedly some gray area in the tax code. For example, maybe you made a certain repair/improvement during your ownership and you aren't sure whether it should be added to the property's cost basis.

In situations like this, it's important to seek the advice of a qualified professional, such as a tax attorney or a reputable and experienced tax professional. Ideally, look for one who specializes in real estate issues. High-dollar tax issues, like real estate capital gains, are closely watched by the IRS, so it's not only important to seek advice to make sure you maximize your tax breaks, but to make sure you're doing it correctly.

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Tax Guidance for Assignors in Real Estate Assignment Transactions

Published: November 13, 2020

Last Updated: April 26, 2021

Tax Guidance for Assignors in a Real Estate Assignment Transaction – a Toronto Tax Lawyer Analysis

Introduction – what is real estate assignment.

Buying and Selling real estate assignments is a common form of transaction in the real estate market. An assignment is a transaction of the rights to a property before the legal ownership of the actual property is transferred. In the real estate context, the buyer of an assignment (the “assignee”) would purchase the rights to a real estate property, typically but not always a condo, that is being built under a Purchase and Sale Agreement, between the assignment seller and the builder, from the seller of the assignment (the “assignor”). This transaction would take place before the closing date of the property, and the ownership of the property legally remained with a third party, the builder, throughout the assignment transaction. Hence only contractual rights to a piece of property were assigned from one party to another in an assignment transaction and not the property itself.

Tax Guidance to Reporting Profits from an Assignment Sale – Capital Gains and GST/HST

The two main tax issues associated with the assignor in an assignment transaction are whether the profits from the sales are to be characterized as business income or taxable capital gain and whether the sales of assignments give rise to the obligation for the assignor to collect and remit GST/HST.

While many assignors would report their profits as taxable capital gains as well as taking the position that assignors are exempt from collecting and remitting GST/HST for sales of the assignments, over the past few years, the CRA has been aggressively going after assignment transactions, often auditing Canadian taxpayers for both unreported taxable business income and unremitted excise tax.

Whether a particular assignment sale will give rise to taxable business income will depend on the facts involved in the case. Similarly, whether the assignor has an obligation to collect and remit GST/HST will also depend on the facts. In short, there is no single answer and simple tax guidance as to how to report your taxes on every assignment transaction. We will breakdown the relevant tax factors below

Taxable Capital Gain vs. Taxable Income

The determination of income versus capital gain is a complex tax topic in which the Income Tax Act itself provides no tax guidance. This means the Tax Court will look to case law for a holistic set of relevant tax factors to determine taxable income vs. taxable capital gains. Please see our article on this general topic for a detailed breakdown (https://taxpage.com/articles-and-tips/a-canadian-tax-lawyers-introduction-to-business-income-vs-capital-gains/).

In the leading case on this issue, Happy Valley Farms Ltd v MNR, the Federal Court chose a set of holistic factors based on the principle of circumstantially determining the taxpayer’s intention at the time of the acquisition of the property. When a taxpayer acquired a property with the intention to resell at a higher value, such intention would strongly suggest the taxpayer has been carrying out business. Therefore, the taxpayer’s income should be characterized as taxable business income.

However, the mere fact an assignor ended up selling his or her legal interest in a piece of real estate property does not evidence that he or she had an intention to resell when he or she initially acquired the property. Usually, CRA has to prove an intention to resell through circumstantial evidence to make an inference that the taxpayer had an intention to resell upon acquisition. In the Happy Valley Farm case itself, the Federal Court determined the intention of the taxpayer by looking at his conduct while holding the property as well as his relevant past conducts.

Factors such as frequency or number of other similar transactions by the taxpayer and circumstances that were responsible for the sale of the property are ultimately tools to help the court to determine the taxpayer’s intention at the time of acquisition. No single Happy Valley Farms factor outside the motive factor is determinative, and the determination of taxable business income versus taxable capital gains in assignment transactions will depend on a holistic assessment of the facts.

GST/HST on Assignment Sales

Unlike the income tax implications of assignment sales, the GST/HST implication of assignment transactions is more clear. The seller in an assignment transaction can often be deemed as a “builder” under the Excise Tax Act, which gives rise to the obligation to collect and remit GST/HST upon the sales of the transaction.

However, even if the seller is not deemed to be a builder, an assignment sale is at the very least a transaction involving a “chose in action” which is considered an enforceable legal right in the property itself. A chose in action is specifically mentioned in the definition of “property” under section 123(1) of the Excise Tax Act

property means any property, whether real or personal, movable or immovable, tangible or intangible, corporeal or incorporeal, and includes a right or interest of any kind, a share and a chose in action, but does not include money; On the other hand, the seller of an assignment transaction can also claim Input Tax Credits for his or her initial purchase of the assignment rights from the builder. Since many buyers and sellers of real estate assignments are likely unaware of the GST/HST implications of assignment transactions, a crucial issue to keep in mind is the deadline and extension mechanism for claiming Input Tax Credit under subsection 225(5) of the Excise Tax Act.

Pro Tax Tips – Prepare for Different Tax Implication for Each Assignment Transaction

The tax implication of an assignment transaction for the assignor will depend on whether the assignor was legally engaging in business activities in the course of buying and selling his or her real estate property interest. Such determination will involve holistically looking at all the relevant facts surrounding the transaction. The nature of an assignment sale itself does not determine whether the profit from such sales should be reported as taxable income or taxable capital gains.

As CRA has been going after assignment transactions aggressively and will likely to continue doing so in the foreseeable future, it is important for Canadian taxpayers to be aware of his or her rights to objection under the Income Tax Act in order to make sure his or her right to file a notice of objection is preserved upon being audited by the CRA .

If you have been contacted by the CRA regarding your past assignment transactions or you have questions regarding a specific assignment transaction that you are contemplating and whether (or not) it constitutes a business transaction, please contact our office to speaking with one of our experienced Canadian tax lawyers.

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Disclaimer:.

"This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer."

About the Author

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David J. Rotfleisch, a leading Canadian tax lawyer, is not only a certified specialist in taxation but also a chartered professional accountant. Most recently, David is a pioneer in Canadian crypto taxation.

As of April 2020, he was one of 12 Ontario Certified Specialists In Taxation™.

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Real Estate Assignment Sales – New Tax Rules

The Federal Budget for 2022 has made amendments to Part IX of the Excise Tax Act (“ETA”). Effective May 7, 2022, all assignment sales in respect of newly constructed or substantially renovated single unit residential complexes or residential condominium units are taxable. 

For clarity, with respect to residential housing transactions, the purchaser (assignor) enters into an agreement of Purchase and Sale with the builder and then sells (assigns) their “rights and obligations” in the agreement of Purchase and Sale to another person (assignee).

Typically, the closing date for a pre-constructions residential property can take several months or even years. During this time, purchasers may decide to assign their rights outlined in the Purchase and Sale agreement to an assignee. The Federal Budget for 2022 now imposes GST/HST tax obligations on assignors and assignees. Essentially, an individual assignor of residential real estate now must collect GST/HST remit it to the CRA. This rule is applicable even to those who do not have a GST/HST number and believe that they are not purchasing and assigning in the course of commercial activity. In cases where the assignor is a non-resident, the assignee is obligated to self-assess the GST/HST. Prior to this amendment, the GST/HST liability depended on whether an individual purchased and assigned their rights in the course of commercial activity and if the purchaser’s true intentions were to live in and use the property, then there would be no GST/HST liability.

Deposit Portion of Assignments

Where an assignment agreement is entered into on or after May 7, 2022, the Budget confirms that GST/HST would not be applicable to the deposit portion of the assignment price. However, it must be indicated in writing that a part of the consideration is attributable to the reimbursement of a deposit paid by the assignor to the builder under the Purchase and Sale agreement. This means that an assignor would only be liable for GST/HST on the amount above the deposit. This also eliminates double taxation and is consistent with the holding from current caselaw, Casa Blanca Homes Ltd. v. The Queen , 2013 TCC 338 .

Where an assignment agreement is entered into before May 7, 2022, and the assignment sale is taxable, the total amount payable for the sale is subject to the GST/HST, this includes any amount paid by the assignor as a deposit to the builder, whether or not this amount is separately identified.

“Anti-flipping” Rule

Budget 2022 further proposes that sales of residential properties owned for less than 12 months are deemed to generate business income under the Income Tax Act (“ITA”). These are subject to limited exceptions such as divorce, or relocation for employment purposes. In terms of assignment sales, it has not yet been determined whether the proposed “anti-flipping” rules would apply since taxpayers do not technically “own” the properties. Tax practitioners are carefully monitoring this. For more information see our previous blog discussing this .

If you have questions about the new rules contact us today !

**Disclaimer

This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions, you should consult a lawyer.

Related posts:

• Withholding Tax for Non-Residents on Real Estate Sales
• Assigning Property and the GST/HST Implications
• How Real Estate Agents can Incorporate a Company
• Capital Gains – Canadians Selling U.S. Real Estate
• Business Expenses for Real Estate Agents

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Here Are The Important Dates You Need To Know Regarding Recent Changes

Individuals : Federal & Quebec

Self-employed, trusts with a tax year end of dec 31, 2021, corporations, canadians with us tax filing.

Posted on 15 January 2024

Capital Gains Tax on Real Estate and Home Sales

When selling your home or a rental property at a gain, there are important capital gains tax rules to keep in mind.

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Capital Gains Basics

Primary home sales, rental property, vacation home, other situations.

Knowing the rules for capital gains tax on residential real estate and home sales is important, especially since your property has likely increased in value since you purchased it. Eventually, when you dispose of the property, either voluntarily or involuntarily, you'll need to determine the federal income tax consequences of that built-in appreciation. 

Perhaps you want to sell your main home, vacation home, or residential rental property that you own. Or you might, unfortunately, be experiencing financial trouble and are considering negotiating a short sale of your home with the bank. Other people may have had their homes destroyed in a wildfire, hurricane, or other natural disaster . You certainly don’t want to be hit with a larger-than-necessary tax bill. 

Continue reading to find out how your capital gains may be taxed (or not) in different situations, including a few ways to defer a potential capital gains tax hit. 

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How capital gains taxes on real estate work

Many people know the basics of the capital gains tax . Gains on the sale of personal or investment property held for more than one year are taxed at favorable capital gains rates of 0%, 15%, or 20%, plus a 3.8% investment tax for people with higher incomes. 

Compare this with gains on the sale of personal or investment property held for one year or less, which are taxed at ordinary income rates up to 37%. 

But there are lots of exceptions to these general rules, with some major carveouts applying to residential real estate. 

Capital gains tax on a primary home

Many homeowners are aware of the general tax rule for home sales. If you have owned and lived in your main home for at least two of the five years leading up to the sale, up to $250,000 ($500,000 for joint filers) of your gain is tax-free. Any gain over the $250,000 or $500,000 exclusion is taxed at capital gains rates . Losses from sales of primary homes are not deductible.

Here's an example: Say you're married, bought your home in 2000, have a tax basis of $325,000, and are selling the home for $650,000. The entire $325,000 gain is tax-free. Let's now take the same example, but instead of selling the home for $650,000, you sell it for $900,000. The first $500,000 of the gain is tax-free, and the remaining $75,000 is taxed at long-term capital gains rates.

• To determine your gain or loss from the sale of your primary home, you start with the amount of gross proceeds reported in Box 2 of Form 1099-S and subtract selling expenses such as commissions to arrive at the amount realized. 
• You then reduce that figure by your tax basis in the home to come up with your gain or loss. 
• To figure the tax basis in your home , start with the original cost, add certain settlement fees and closing costs, plus the cost of any additions as well as improvements that add to the value of your home, prolong its useful life, or adapt it to new uses. 
• IRS Publication 523 has some examples of improvements that increase your tax basis in the home and those that don’t. 

Related: Capital Gains Tax Home Sale Exclusion: What to Know

If you must sell your home early, you may still be eligible for a portion of the exclusion, depending on the circumstances. Sales due to job changes, illness, or unforeseen circumstances qualify. The percentage of the $500,000 or $250,000 gain exclusion that can be taken is equal to the portion of the two-year period that you used the home as a residence. 

For example, say a single person bought a home for $720,000 in March 2023, lived in it for 15 months, and sold it in May 2024, for $785,000 after moving out of state for a job. The maximum gain exclusion in this instance is $156,250 ($250,000 x (15/24)). So, the $65,000 gain is fully excluded and tax-free. You can use days or months for this calculation.

Selling primary home after death of a spouse

A spouse who sells the family home within two years after the death of the other spouse gets the full $500,000 exclusion that is generally available only to couples, provided the two-out-of-five-year use and ownership tests were met before death. 

• There is also a welcome added tax benefit if you owned the home jointly with your spouse. 
• If you don’t live in a community property state, half of the home will get a step-up in tax basis upon the death of the first-to-die spouse. 
• The rule is more generous if the house is held as community property. The entire tax basis is stepped up to fair market value when the first spouse dies.  

Here’s an example. 

Let’s say you and your spouse bought a home for $150,000 many years ago in a non-community property state, and it is worth $980,000 on the date the first of you dies. The survivor’s tax basis in the home jumps to $565,000 (his or her half of the original $150,000 basis plus half of the deceased spouse’s $980,000 date-of-death value). 

Twenty months later, the surviving spouse sells the home for $1,085,000. Of the $520,000 gain from the home sale ($1,085,000 - $565,000), $500,000 is tax-free and $20,000 is taxed at long-term capital gains rates.

Selling a primary home where you claimed a home office deduction

You may be wondering whether the capital gain tax on the sale of your home would differ if you took the home office tax deduction in prior years for using a room or other space in your residence exclusively and regularly for business or rental (e.g., as a home office or the rental of a spare bedroom). It depends.

Generally, the tax consequences are the same whether or not the home office deduction was previously claimed. Gain on the office or rental portion generally qualifies as part of the $250,000/$500,000 capital gains tax exclusion for a primary home sale, subject to two exceptions. 

The first is for so-called unrecaptured Section 1250 gain, which applies if you took depreciation deductions in the past for the office or rental space. ( This is discussed in more detail below .) If you used the simplified method to claim home office deductions on your return, you don't have to worry about this. 

The second exception applies if the workspace or rental space is in a building on the property separate from the main home — think first-floor storefront with an attached residence, rented apartment in a duplex, or working farm with a farmhouse on the property.

How are capital gains calculated on rental property?

If you hold rental property, the gain or loss when you sell is generally characterized as a capital gain or loss. If held for more than one year, it's long-term capital gain or loss and if held for one year or less, it's short-term capital gain or loss. The gain or loss is the difference between the amount realized on the sale and your tax basis in the property.

The capital gain will generally be taxed at 0%, 15%, or 20%, plus the 3.8% surtax for people with higher incomes. However, a special rule applies to gain on the sale of rental property for which you took depreciation deductions. 

When depreciable real property held for more than one year is sold at a gain, the rule requires that previously deducted depreciation be recaptured into income and taxed at a top rate of 25%. It's known as unrecaptured Section 1250 gain, the number of its federal tax code section.

Capital gains on sale of vacation home

Gains from the sale of vacation homes don't qualify for the $250,000/$500,000 capital gains tax exclusion that applies to the sale of main homes. 

• When you sell a vacation home, your gain will be subject to the normal capital gains tax on real estate. 
• If you owned the home for more than one year before you sell, then the difference between your amount realized on the sale and your tax basis in the home is subject to a capital gains tax rate of 0%, 15%, or 20%, depending on your income, plus a 3.8% surtax for upper-income individuals.

For example, say you sell a vacation home that you owned since 2010 for $775,000, and you have a tax basis of $610,000. Your $165,000 gain is taxed at capital gains rates. As with primary homes, you can't deduct a loss on the sale of a vacation home.

What if you convert a vacation home to your primary residence, live there for at least two years, and then sell it? Can you qualify for the full $250,000/$500,000 capital gains tax exclusion? The answer is generally no.

• If you sell a main home that you previously used as a vacation home, some or all of the gain is ineligible for the home-sale exclusion. 
• The portion of the gain that is taxed is based on the ratio of the period after 2008 that the home was used as a second residence or rented out to the total time that the seller owned the house. 
• The remaining gain is eligible for the $250,000 or $500,000 home-sale exclusion .

Capital gains from a short sale of your main home

Some financially distressed homeowners might be considering a short sale of their home. A short sale occurs when your mortgage lender agrees to accept less than the outstanding balance on your loan to help facilitate a quick sale of the property. The tax rules applicable to short sales differ depending on whether the debt is recourse or nonrecourse.

Recourse debt is when the debtor remains personally liable for any shortfall. If the lender forgives the remaining debt, a special tax rule provides that up to $750,000 in forgiven debt on a primary home is tax-free. The debtor will be taxed on any remaining forgiven debt at ordinary income tax rates up to 37%.

The tax results are different for nonrecourse debt, meaning the debtor isn't personally liable for the deficiency. In this case, the waived debt is included in the amount realized for calculating capital gain or loss on the short sale. For primary homes, no loss is allowed, and up to $250,000 of gain ($500,000 for joint filers) can be excluded from income for homeowners that meet the two-out-of-five-year use and ownership tests.

Destruction of your main home

If your principal residence is damaged or destroyed in a hurricane, widespread wildfire, or other federally declared disaster, you'll have gain to the extent the insurance proceeds you receive exceed your pre-disaster tax basis in the home.

• Up to $250,000 ($500,000 for joint filers) of that gain is excluded from income if you meet the two-out-of-five-year use and ownership tests. 
• Gain in excess of those amounts is taxed at capital gains rates.

One way to delay the tax hit on all or part of the otherwise taxable capital gains is to use the proceeds you get from your insurance company to buy a new home within four years of the disaster. The so-called "involuntary conversion" rules are complex, so be sure to contact your tax adviser if you are thinking about going down this road.

Capital gains tax on 1031 exchanges

When real property used in a business or held for investment is exchanged for like-kind real property under Section 1031 of the tax code , all or part of the gain that would otherwise be triggered if the realty were sold can be deferred. This tax break doesn't apply to main homes or vacation homes, but it can apply to rental real estate that you own.

The 1031 exchange rules are very complicated and tricky, with many requirements to meet. As a result, make sure to talk to your tax adviser if you're contemplating a like-kind swap.

Can you defer capital gains with Opportunity Funds?

The Qualified Opportunity Zone program was created under Donald Trump’s 2017 tax reform law, the Tax Cuts and Jobs Act (TCJA). 

• The program allows taxpayers to deter capital gains from the sale of business or personal property, including real estate, by investing the proceeds in entities called Qualified Opportunity Funds . 
• These QOFs then use the money to help the development of struggling communities. 
• As with many of the provisions in the TCJA , this program is set to expire after 2025.

Let’s say you have a large capital gain from the sale of a rental home that you owned, and you want to defer paying federal income tax on that gain. If you can invest those gains proceeds in a QOF, you could see lots of tax benefits. 

The gains are deferred until the earlier of Dec. 31, 2026, or when you dispose of your QOF interest. The tax would generally be owed at that time on the deferred gains less the tax basis in the QOF investment. 

The longer one holds a QOF investment, the more tax incentives there are. You, as the investor, would begin with a zero-tax basis. 

( Note that the deferred gain from your real estate sale will be taxed in 2026. )

You have 180 days from selling your real estate to invest the proceeds in a QOF. You can invest all of your short- or long-term capital gain proceeds from the sale or just part of the gains. But if you invest part of the gains, only that portion of the gains contributed to the QOF qualifies for deferral. 

If you decide to go the QOF route, you must elect the tax deferral on your tax return for the year of the sale. Follow the instructions on Form 8949 for electing deferral and reporting the deferred gain and submit Form 8949 with your return. 

Also, you’ll have to complete and attach Form 8997 to your return. The 8997 lets the IRS know of the QOF investment and the amount of gain deferred, among other information.

Related Content

• Capital Gains Tax Home Sale Exclusion: What to Know
• More Homeowners Face Capital Gains Tax Bills
• How to Compute Tax Basis to Save Money When You Sell a Home
• Do You Know the Tax Rules for Home Mortgages?: Kiplinger Tax Letter

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Joy is an experienced CPA and tax attorney with an L.L.M. in Taxation from New York University School of Law. After many years working for big law and accounting firms, Joy saw the light and now puts her education, legal experience and in-depth knowledge of federal tax law to use writing for Kiplinger. She writes and edits  The Kiplinger Tax Letter  and contributes federal tax and retirement stories to  kiplinger.com  and  Kiplinger’s Retirement Report . Her articles have been picked up by the  Washington Post  and other media outlets. Joy has also appeared as a tax expert in newspapers, on television and on radio discussing federal tax developments. 

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Topic no. 409, Capital gains and losses

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Almost everything you own and use for personal or investment purposes is a capital asset. Examples of capital assets include a home, personal-use items like household furnishings, and stocks or bonds held as investments. When you sell a capital asset, the difference between the adjusted basis in the asset and the amount you realized from the sale is a capital gain or a capital loss. Generally, an asset's basis is its cost to the owner, but if you received the asset as a gift or inheritance, refer to  Publication 551, Basis of Assets  for information about your basis. You have a capital gain if you sell the asset for more than your adjusted basis. You have a capital loss if you sell the asset for less than your adjusted basis. Losses from the sale of personal-use property, such as your home or car, aren't tax deductible.

Short-term or long-term

To correctly arrive at your net capital gain or loss, capital gains and losses are classified as long-term or short-term. Generally, if you hold the asset for more than one year before you dispose of it, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or loss is short-term. For exceptions to this rule, such as property acquired by gift, property acquired from a decedent, or patent property, refer to Publication 544, Sales and Other Dispositions of Assets ; for commodity futures, see Publication 550, Investment Income and Expenses ; or for applicable partnership interests, see Publication 541, Partnerships . To determine how long you held the asset, you generally count from the day after the day you acquired the asset up to and including the day you disposed of the asset.

If you have a net capital gain, a lower tax rate may apply to the gain than the tax rate that applies to your ordinary income. The term "net capital gain" means the amount by which your net long-term capital gain for the year is more than your net short-term capital loss for the year. The term "net long-term capital gain" means long-term capital gains reduced by long-term capital losses including any unused long-term capital loss carried over from previous years. The term “net short-term capital loss” means the excess of short-term capital losses (including any unused short-term capital losses carried over from previous years) over short-term capital gains for the year.

Capital gains tax rates

Net capital gains are taxed at different rates depending on overall taxable income, although some or all net capital gain may be taxed at 0% . For taxable years beginning in 2023, the tax rate on most net capital gain is no higher than  15%  for most individuals.

A capital gains rate of 0% applies if your taxable income is less than or equal to:

• $44,625 for single and married filing separately;
• $89,250 for married filing jointly and qualifying surviving spouse; and
• $59,750 for head of household.

A capital gains rate of  15%  applies if your taxable income is:

• more than $44,625 but less than or equal to $492,300 for single;
• more than $44,625 but less than or equal to $276,900 for married filing separately;
• more than $89,250 but less than or equal to $553,850 for married filing jointly and qualifying surviving spouse; and
• more than $59,750 but less than or equal to $523,050 for head of household.

However, a capital gains rate of  20%  applies to the extent that your taxable income exceeds the thresholds set for the  15%  capital gain rate.

There are a few other exceptions where capital gains may be taxed at rates greater than 20% :

• The taxable part of a gain from selling section 1202 qualified small business stock is taxed at a maximum 28% rate.
• Net capital gains from selling collectibles (such as coins or art) are taxed at a maximum 28% rate.
• The portion of any unrecaptured section 1250 gain from selling section 1250 real property is taxed at a maximum 25% rate.

Note: Net short-term capital gains are subject to taxation as ordinary income at graduated tax rates.

Limit on the deduction and carryover of losses

If your capital losses exceed your capital gains, the amount of the excess loss that you can claim to lower your income is the lesser of $3,000 ($1,500 if married filing separately) or your total net loss shown on line 16 of Schedule D (Form 1040), Capital Gains and Losses . Claim the loss on line 7 of your Form 1040 or Form 1040-SR . If your net capital loss is more than this limit, you can carry the loss forward to later years. You may use the Capital Loss Carryover Worksheet found in Publication 550  or in the Instructions for Schedule D (Form 1040) PDF to figure the amount you can carry forward.

Where to report

Report most sales and other capital transactions and calculate capital gain or loss on Form 8949, Sales and Other Dispositions of Capital Assets , then summarize capital gains and deductible capital losses on Schedule D (Form 1040) .

Estimated tax payments

If you have a taxable capital gain, you may be required to make estimated tax payments. For additional information, refer to Publication 505, Tax Withholding and Estimated Tax, Estimated Taxes and Am I required to make estimated tax payments?

Net investment income tax

Individuals with significant investment income may be subject to the Net Investment Income Tax (NIIT). For additional information on the NIIT, see Topic no. 559 .

Additional information

Additional information on capital gains and losses is available in Publication 550 and Publication 544 . If you sell your main home, refer to Topic no. 701 , Topic no. 703 and Publication 523, Selling Your Home .

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Capital Gains Tax on Home Sales: How Taxes on Real Estate Work

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You might be able to avoid some capital gains tax on a home sale if you qualify for the home sale tax exclusion.

Short-term capital gains on real estate sold in a year or less are taxed at your ordinary income tax rate.

Long-term capital gains on homes sold after a year of ownership are taxed at 0%, 15% or 20%.

It can feel great to get a high price for your home, but in some cases, the IRS may want a piece of the action. That’s because capital gains on home sales and other real estate can be taxable.

What is the capital gains tax on real estate?

When you sell your home for more than what you paid for it, you could be subject to capital gains tax on the profit. Capital gains tax rates are generally determined by three factors: your taxable income, your filing status and how long you had the property before you sold it.

However, some homeowners may be able to avoid paying capital gains tax on their profit because of an IRS exemption rule called the Section 121 exclusion (also known as the home sale tax exclusion) [0] Internal Revenue Service . Topic No. 701, Sale of Your Home . Accessed May 31, 2024. View all sources .

» Find out if your home sale will trigger capital gains taxes

How capital gains taxes on home sales work

Generally, the IRS allows people who sold their primary homes to exclude a certain amount of the profit from their reportable income. Single filers and those married filing separately can exclude $250,000 of capital gains and those married filing jointly can exclude up to $500,000 [0] Internal Revenue Service . Topic No. 701 Sale of Your Home . Accessed May 31, 2024. View all sources . If your profit exceeds this threshold, you may owe capital gains tax on the overage.

If you want to take advantage of the capital gains tax exclusion on home sales, you need to know the rules . Not all types of properties are eligible, and certain ownership factors can disqualify you from taking the exclusion.

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Calculating capital gains tax on a home sale

The capital gains tax on the sale of a home depends on the amount of profit you make from the sale. Profit is generally defined as the difference between how much you paid for the home and how much you sold it for.

If you owned the home for a year or less before selling, short-term capital gains tax rates may apply. The rate is equal to your ordinary income tax rate, also known as your income tax bracket.

If you owned the home for longer than a year before selling, long-term capital gains tax rates may apply. These rates are much more forgiving. Many people qualify for a 0% tax rate. Everybody else pays either 15% or 20%, depending on your filing status and taxable income.

Example: Let's say that you bought a home 10 years ago for $200,000 and sold it today for $800,000. Your net profit would be $600,000. If you’re married and filing jointly, $500,000 of that gain might not be subject to the capital gains tax because of the exclusion — but $100,000 of the gain could be subject to long-term capital gains tax.

» Learn more: Short-term and long-term capital gains tax rates

Who qualifies for the home sale capital gains tax exclusion?

If you sell a house, all of the points below must be true — otherwise, you may owe capital gains taxes on the entire gain from the sale. The list is not exhaustive, as the rules for this exclusion can be complex. If you have questions, consider reviewing Publication 523 or speaking with a tax advisor .

1. The home must be your principal residence

The IRS defines "home" broadly — your home could be a condo, a co-op, a mobile home or even a houseboat. The key to being eligible for the home sale capital gains tax exclusion is that it must be your primary (what the IRS calls "principal") home, meaning the place where you spend most of your time.

Details that strengthen your home's status as primary include that the home's address is used in your official documents (tax returns, driver's license, voting registration, and with the Postal Service) and that the residence is close by to certain day-to-day needs, such as your bank, your workplace, or any types of organizations you are part of [0] Internal Revenue Service . Publication 523 (2023), Selling Your Home: Does Your Home Sale Qualify for the Exclusion of Gain? . Accessed May 31, 2024. View all sources .

If you own more than one home, you should conduct a "facts and circumstances" test to make sure the home you're selling will be recognized as a principal residence by the IRS.

2. You must have owned the home for at least two years

The agency requires that you must have owned the home for at least two years in the five-year period before you sold it. You may catch a break here if you're married and filing jointly — only one of the spouses is required to meet this test [0] Internal Revenue Service . Publication 523 (2022), Selling Your Home: Eligibility Step 2—Ownership . Accessed May 31, 2024. View all sources .

3. You must have lived in the house for at least two years in the five-year period before you sold it

Owning the home isn't enough to avoid capital gains on the sale — the IRS also wants to make sure that you actually intended to live in the house, at least for a certain period of time. Living in the home for at least two of the five years helps to establish this. The IRS is flexible here — the 24 months don't have to be consecutive, and temporary absences, such as vacations, also don't count as being "away."

People who are disabled or need outpatient care, as well as people in the military, Foreign Service, or intelligence community, may also be exempt from this rule. See IRS Publication 523 for details [0] Internal Revenue Service . Publication 523 (2022), Selling Your Home . Accessed May 31, 2024. View all sources .

4. You cannot have claimed the home sale capital gains exclusion recently

You can't claim the exclusion if you already took it for another home in the two-year period before the sale of this home.

5. You cannot have bought the house through a like-kind exchange

Your home is not qualified for the exclusion if you purchased it through a like-kind exchange, also sometimes called a 1031 exchange , in the past five years. This kind of purchase basically means swapping one investment property for another.

6. You cannot be subject to expatriate tax

The expatriate tax is a fee levied by the IRS on certain people who have given up their citizenship, or who have given up their U.S. residency status as a result of living abroad for an extended period of time [0] Internal Revenue Service . Expatriation Tax . Accessed Mar 20, 2024. View all sources . If you are subject to this tax, you can't take the exclusion.

Will you owe capital gains taxes on your home sale?

How to avoid capital gains taxes on real estate, 1. live in the house for at least two years.

The two years don’t need to be consecutive, but house flippers should beware. If you sell a house that you didn’t live in for at least two years, the gains can be taxable. Selling in less than a year is especially expensive because you could be subject to the short-term capital gains tax, which is higher than the long-term capital gains tax.

2. See whether you qualify for an exception

If you have a taxable gain on the sale of your home, you might still be able to exclude some of it if you sold the house because of work, health or “an unforeseeable event,” according to the IRS. Check IRS Publication 523 for details [0] Internal Revenue Service . Publication 523 (2022), Selling Your Home . Accessed May 31, 2024. View all sources .

3. Keep the receipts for your home improvements

The cost basis of your home typically includes what you paid to purchase it, as well as the improvements you've made over the years. When your cost basis is higher, your exposure to the capital gains tax may be lower. Remodels, expansions, new windows, landscaping, fences, new driveways, air conditioning installs — they’re all examples of things that might cut your capital gains tax.

How taxes on rental and investment sales work

The capital gains tax exclusion only applies to the sale of your primary home. It doesn't work for commercial real estate, rental properties or houses used as investment vehicles. This also means your secondary home or a vacation home that you rent out in the off-season would need to be converted into your main residence — among the other rules above — for the exemption to apply.

Navigating the tax rules of selling a real estate or an investment property can be complex. Long- or short-term capital gains tax will apply upon sale, depending on how long you owned the house. But there are also ways to minimize or defer taxes on these types of properties. Consider speaking with a tax advisor or financial advisor to learn more.

» Own a rental property? Five big rental property tax deductions to know about

Is there an over-55 home sale exemption?

No. Homeowners aged 55 and above used to be eligible for a one-time $125,000 capital gains tax exclusion on the sale of their home, but this tax law expired in 1997 and was replaced by the current $500,000 exclusion cap, which is applicable to a wider range of taxpayers [0] Internal Revenue Service . 1997 Publication 523: Selling Your Home . Accessed May 31, 2024. View all sources .

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You could owe capital gains tax if you sell a home that has appreciated in value because it is a capital asset. However, thanks to the Taxpayer Relief Act of 1997 , most homeowners are exempt from needing to pay it.

If you are single, you will pay no capital gains tax on the first $250,000 of profit (excess over cost basis ). Married couples enjoy a $500,000 exemption. However, there are some restrictions. Learn the details below, including the records you should keep while you own a home to help offset any taxes that could be due.

Key Takeaways

• You can sell your primary residence and be exempt from capital gains taxes on the first $250,000 if you are single and $500,000 if married filing jointly.
• This exemption is only allowable once every two years.
• You can add your cost basis and costs of any improvements that you made to the home to the $250,000 if single or $500,000 if married filing jointly.

How Much Is Capital Gains Tax on Real Estate?

To be exempt from capital gains tax on the sale of your home, the home must be considered your principal residence based on Internal Revenue Service (IRS) rules. These rules state that you must have occupied the residence for at least 24 months of the last five years.

If you buy a home and a dramatic rise in value causes you to sell it a year later, you would be required to pay full capital gains tax—short-term or long-term on the house, depending on exactly how long you owned it.

Short-term capital gains are taxed as ordinary income, with rates as high as 37% for high-income earners. Long-term capital gains tax rates are 0%, 15%, 20%, or 28% for small business stock and collectibles, with rates applied according to income and tax filing status.

However, if you’ve owned your home for at least two years and meet the principal residence rules, you may be able to exclude some or all of the long-term capital gains tax that would be owed on the profit. Single people can exclude up to $250,000 of the gain, and married people filing a joint return can exclude up to $500,000 of the gain.

This rule even allows you to convert a rental property into a principal residence because the two-year residency requirement does not need to be fulfilled in consecutive years, just cumulative months.

Widowed taxpayers may be able to increase the exclusion amount from $250,000 to $500,000 when meeting all of the following conditions.

• They sell their home within two years of the death of their spouse
• They haven’t remarried at the time of the sale
• Neither the seller or their late spouse took the exclusion on another home sold less than two years before the date of the current home sale
• They meet the two-year ownership and residence requirements.

The 2-in-5-Year Rule

For taxpayers with more than one home, a key point is determining which is the principal residence. The IRS allows the exclusion only on one’s principal residence, but there is some leeway for which home qualifies. The two-in-five-year rule comes into play. Simply put, this means that during the previous five years, if you lived in a home for a total of two years, or 730 days, that can qualify as your primary residence. The 24 months do not have to be in a particular block of time.

One caveat: For married taxpayers filing jointly to qualify for the $500,000 exclusion, each spouse has to have met the residence requirement, even if only one spouse is the owner of the property. For example, a married couple filing jointly sells their primary residence, which is owned by one spouse. Both spouses have lived in the house for 24 months out of the previous five years, so the couple qualifies for the $500,000 exclusion. By comparison, a recently married couple filing jointly sell their primary residence, which is owned by one spouse. The owner's spouse has lived in the house for 24 months out of the previous five years, but the non-owner spouse has only lived in the house for 12 months out of the five years. This couple would not qualify for the $500,000 exclusion, just the $250,000 exclusion for the owner who met the residence requirement.

How the Capital Gains Tax Works With Homes

Suppose you purchase a new condo for $300,000. You live in it for the first year, rent the home for the next three years, and when the tenants move out, you move in for another year. After five years, you sell the condo for $450,000. No capital gains tax is due because the profit ($450,000 - $300,000 = $150,000) does not exceed the exclusion amount. Consider an alternative ending in which home values in your area increased exponentially.

In this scenario, you sell the condo for $600,000. Capital gains tax is due on $50,000 ($300,000 profit - $250,000 IRS exclusion). If your income falls in the $44,626–$492,300 range, for 2023, your tax rate is 15%. If you have capital losses elsewhere, you can offset the capital gains from the sale of the house with those losses, and up to $3,000 of those losses from other taxable income.

If you meet the eligibility requirements of the IRS, you’ll be able to sell the home free of capital gains tax. However, there are exceptions to the eligibility requirements, which are outlined on the IRS website.

The main major restriction is that you can only benefit from this exemption once every two years. Therefore, if you have two homes and lived in each for at least two of the last five years, you won’t be able to sell both of them tax free until more than two years have passed since you sold the first one.

The Taxpayer Relief Act of 1997 significantly changed the implications of home sales in a beneficial way for homeowners. Before the act, sellers had to roll the full value of a home sale into another home within two years to avoid paying capital gains tax. However, this is no longer the case, and the proceeds of the sale can be used in any way that the seller sees fit.

Not everyone can take advantage of the capital gains exclusions . Gains from a home sale are fully taxable when:

• The home is not the seller’s principal residence.
• The property was acquired through a 1031 exchange (more on that below) within five years.
• The seller is subject to expatriate taxes.
• The property was not owned and used as the seller’s principal residence for at least two of the last five years prior to the sale (some exceptions apply).
• The seller sold another home within two years from the date of the sale and used the capital gains exclusion for that sale.

Example of Capital Gains Tax on a Home Sale

Consider the following example: Susan and Robert, a married couple, purchased a home for $500,000 in 2015. Their neighborhood experienced tremendous growth, and home values increased significantly. Seeing an opportunity to reap the rewards of this surge in home prices, they sold their home in 2022 for $1.2 million. The capital gains from the sale were $700,000.

As a married couple filing jointly, they were able to exclude $500,000 of the capital gains, leaving $200,000 subject to capital gains tax. Their combined income places them in the 20% tax bracket . Therefore, their capital gains tax was $40,000.

Most commonly, real estate is categorized as investment or rental property or as a principal residence. An owner’s principal residence is the real estate used as the primary location in which they live. But what if the home you are selling is an investment property , rather than your principal residence? An investment or rental property is real estate purchased or repurposed to generate income or a profit for the owner(s) or investor(s).

Being classified as an investment property, rather than as a second home, affects how it’s taxed and which tax deductions, such as mortgage interest deductions, can be claimed. Under the Tax Cuts and Jobs Act (TCJA) of 2017 , up to $750,000 of mortgage interest on a principal residence or vacation home can be deducted. However, if a property is solely used as an investment property, it does not qualify for the capital gains exclusion.

Deferrals of capital gains tax are allowed for investment properties under the 1031 exchange if the proceeds from the sale are used to purchase a like-kind investment. Capital losses incurred in the tax year can be used to offset capital gains from the sale of investment properties. So, although not afforded the capital gains exclusion, there are ways to reduce or eliminate taxes on capital gains for investment properties.

Rental Property vs. Vacation Home

Rental properties are real estate rented to others to generate income or profits. A vacation home is real estate used recreationally and not considered the principal residence. It is used for short-term stays, primarily for vacations.

Homeowners often convert their vacation homes to rental properties when they are not using them. The income generated from the rental can cover the mortgage and other maintenance expenses. However, there are a few things to keep in mind. If the vacation home is rented out for fewer than 15 days , the income is not reportable. If the vacation home is used by the homeowner for fewer than two weeks in a year and then rented out for the remainder, it is considered an investment property.

Homeowners can take advantage of the capital gains tax exclusion when selling a vacation home if they meet the IRS ownership and use rules. But a second home will generally not qualify for a 1031 exchange (see below).

How to Avoid Capital Gains Tax on Home Sales

Want to lower the tax bill on the sale of your home? There are ways to reduce what you owe or avoid taxes on the sale of your property . If you own and have lived in your home for two of the last five years, you can exclude up to $250,000 ($500,000 for married people filing jointly) of the gain from taxes.

Adjustments to the cost basis can also help reduce the gain. Your cost basis can be increased by including fees and expenses associated with the purchase of the home, home improvements, and additions. The resulting increase in the cost basis thereby reduces the capital gains.

Also, capital losses from other investments can be used to offset the capital gains from the sale of your home. Large losses can even be carried forward to subsequent tax years. Let’s explore other ways to reduce or avoid capital gains taxes on home sales.

Use 1031 Exchanges to Avoid Taxes

Homeowners can avoid paying taxes on the sale of a home by reinvesting the proceeds from the sale into a similar property through a 1031 exchange . This like-kind exchange—named after Internal Revenue Code Section 1031—allows for the exchange of like property with no other consideration or like property including other considerations, such as cash. The 1031 exchange allows for the tax on the gain from the sale of a property to be deferred, rather than eliminated.

Owners—including corporations, individuals, trusts, partnerships, and limited liability companies (LLCs)—of investment and business properties can take advantage of the 1031 exchange when exchanging business or investment properties for those of like kind.

The properties subject to the 1031 exchange must be for business or investment purposes , not for personal use. The party to the 1031 exchange must identify in writing replacement properties within 45 days from the sale and must complete the exchange for a property comparable to that in the notice within 180 days from the sale.

To prevent someone from taking advantage of the 1031 exchange and capital gains exclusion, the American Jobs Creation Act of 2004 stipulates that the exclusion applies if the exchanged property had been held for at least five years after the exchange.

An IRS memo explains how the sale of a second home could be shielded from the full capital gains tax, but the hurdles are high. It would have to be an investment property exchanged for another investment property. The taxpayer has to have owned the property for two full years, it has to have been rented to someone for a fair rental rate for at least 14 days in each of the previous two years, and it cannot have been used for personal use for 14 days or 10% of the time it was otherwise rented, whichever is greater, for the previous 12 months.

Since executing a 1031 exchange can be a complex process, there are advantages to working with a reputable, full-service 1031 exchange company. Given their scale, these services generally cost less than attorneys who charge by the hour. A firm that has an established track record in working with these transactions can help you avoid costly missteps and ensure that your 1031 exchange meets the requirements of the tax code.

Convert Your Second Home Into Your Principal Residence

Capital gains exclusions are attractive to many homeowners, so much so that they may try to maximize its use throughout their lifetime. Because gains on non-principal residences and rental properties do not have the same exclusions, people have sought ways to reduce their capital gains tax on the sale of their properties. One way to accomplish this is to convert a second home or rental property to a principal residence.

A homeowner can make their second home into their principal residence for two years before selling and take advantage of the IRS capital gains tax exclusion. However, stipulations apply. Deductions for depreciation on gains earned prior to May 6, 1997, will not be considered in the exclusion.

According to the Housing Assistance Tax Act of 2008 , a rental property converted to a primary residence can only have the capital gains exclusion during the term when the property was used as a principal residence. The capital gains are allocated to the entire period of ownership. While serving as a rental property, the allocated portion falls under non-qualifying use and is not eligible for the exclusion.

Realizing a large profit at the sale of an investment is the dream. However, the corresponding tax on the sale may not be. For owners of rental properties and second homes, there is a way to reduce the tax impact . To reduce taxable income, the property owner might choose an installment sale option, in which part of the gain is deferred over time. A specific payment is generated over the term specified in the contract.

Each payment consists of principal, gain, and interest, with the principal representing the nontaxable cost basis and interest taxed as ordinary income. The fractional portion of the gain will result in a lower tax than the tax on a lump-sum return of gain. How long the property owner holds the property will determine how it’s taxed: long-term or short-term capital gains.

How to Calculate the Cost Basis of a Home

The cost basis of a home is what you paid (your cost) for it. Included are the purchase price, certain expenses associated with the home purchase, improvement costs, certain legal fees, and more.

Example: In 2010, Rachel purchased her home for $400,000. She made no improvements and incurred no losses for the 12 years that she lived there. In 2022, she sold her home for $550,000. Her cost basis was $400,000, and her taxable gain was $150,000. She elected to exclude the capital gains and, as a result, owed no taxes.

What Is Adjusted Home Basis?

The cost basis of a home can change. Reductions in cost basis occur when you receive a return of your cost. For example, you purchased a house for $250,000 and later experienced a loss from a fire. Your home insurer issues a payment of $100,000, reducing your cost basis to $150,000 ($250,000 original cost basis - $100,000 insurance payment).

Improvements that are necessary to maintain the home with no added value, have a useful life of less than one year, or are no longer part of your home will not increase your cost basis.

Likewise, some events and activities can increase the cost basis. For example, you spend $15,000 to add a bathroom to your home. Your new cost basis will increase by the amount that you spent to improve your home.

Basis When Inheriting a Home

If you inherit a home, the cost basis is the fair market value (FMV) of the property when the original owner died. For example, say you are bequeathed a house for which the original owner paid $50,000. The home was valued at $400,000 at the time of the original owner’s death. Six months later, you sell the home for $500,000. The taxable gain is $100,000 ($500,000 sales price - $400,000 cost basis).

The FMV is determined on the date of the death of the grantor or on the alternate valuation date if the executor files an estate tax return and elects that method.

You must report the sale of a home if you received a Form 1099 -S reporting the proceeds from the sale or if there is a non-excludable gain. Form 1099-S is an IRS tax form reporting the sale or exchange of real estate. This form is usually issued by the real estate agency, closing company, or mortgage lender. If you meet the IRS qualifications for not paying capital gains tax on the sale, inform your real estate professional by Feb. 15 following the year of the transaction.

The IRS details which transactions are not reportable:

• If the sales price is $250,000 ($500,000 for married people) or less and the gain is fully excludable from gross income. The homeowner must also affirm that they meet the principal residence requirement. The real estate professional must receive certification that these attestations are true.
• If the transferor is a corporation, a government or government sector, or an exempt volume transferor (someone who has or will sell 25 or more reportable real estate properties to 25 or more parties)
• Non-sales, such as gifts
• A transaction to satisfy a collateralized loan
• If the total consideration for the transaction is $600 or less, which is called a de minimis transfer

Special Situations: Divorce and Military Personnel

Getting divorced or being transferred because you are military personnel can complicate a taxpayer’s ability to qualify for the use requirement for capital gains tax exclusions on home sales. Fortunately, there are considerations for these situations.

In a divorce, the spouse granted ownership of a home can count the years when the home was owned by the former spouse to qualify for the use requirement. Also, if the grantee has ownership in the house, the use requirement can include the time that the former spouse spends living in the home until the date of sale.

Military Personnel and Certain Government Officials

Military personnel and certain government officials on official extended duty and their spouses can choose to defer the five-year requirement for up to 10 years while on duty. Essentially, as long as the military member occupies the home for two out of 15 years, they qualify for the capital gains exclusion (up to $250,000 for single taxpayers and up to $500,000 for married taxpayers filing jointly).

Can Home Sales Be Tax Free?

Yes. Home sales can be tax free as long as the condition of the sale meets certain criteria:

• The seller must have owned the home and used it as their principal residence for two out of the last five years (up to the date of closing). The two years do not have to be consecutive to qualify.
• The seller must not have sold a home in the last two years and claimed the capital gains tax exclusion.
• If the capital gains do not exceed the exclusion threshold ($250,000 for single people and $500,000 for married people filing jointly), the seller does not owe taxes on the sale of their house.

How Do I Avoid Paying Taxes When I Sell My House?

There are several ways to avoid paying taxes on the sale of your house. Here are a few:

• Offset your capital gains with capital losses. Capital losses from previous years can be carried forward to offset gains in future years.
• Use the Internal Revenue Service (IRS) primary residence exclusion, if you qualify. For single taxpayers, you may exclude up to $250,000 of the capital gains, and for married taxpayers filing jointly, you may exclude up to $500,000 of the capital gains (certain restrictions apply).
• If the home is a rental or investment property, use a 1031 exchange to roll the proceeds from the sale of that property into a like investment within 180 days.

How Much Tax Do I Pay When Selling My House?

How much tax you pay is dependent on the amount of the gain from selling your house and on your tax bracket. If your profits do not exceed the exclusion amount and you meet the IRS guidelines for claiming the exclusion, you owe nothing. If your profits exceed the exclusion amount and you earn $44,626 to $492,300 (2023 rate), you will owe a 15% tax (based on the single filing status) on the profits.

Do I Have to Report the Sale of My Home to the IRS?

It is possible that you are not required to report the sale of your home if none of the following is true:

• You have non-excludable, taxable gain from the sale of your home (less than $250,000 for single taxpayers and less than $500,000 for married taxpayers filing jointly).
• You were issued a Form 1099-S, reporting proceeds from real estate transactions.
• You want to report the gain as taxable, even if all or a portion falls within the exclusionary guidelines.

Do You Pay Capital Gains Taxes When You Sell a Second Home?

Because the IRS allows exemptions from capital gains taxes only on a principal residence, it’s difficult to avoid capital gains taxes on the sale of a second home without converting that home to your principal residence. This involves conforming to the two-in-five-year rule (you lived in it for a total of two of the past five years). Put simply, you can prove that you spent enough time in one home that it qualifies as your principal residence.

If one of the homes was primarily an investment, it’s not set up to be the exemption-eligible home.

The demarcation between investment property and vacation property goes like this: It’s investment property if the taxpayer has owned the property for two full years, it has been rented to someone for a fair rental rate for at least 14 days in each of the previous two years, and it cannot have been used for personal use for 14 days or 10% of the time that it was otherwise rented, whichever is greater, for the previous 12 months.

If you or your family use the home for more than two weeks a year, it’s likely to be considered personal property, not investment property. This makes it subject to taxes on capital gains, as would any other asset other than your principal residence.

Do You Pay Capital Gains If You Lose Money on a Home Sale?

You can’t deduct the losses on a primary residence, nor can you treat it as a capital loss on your taxes. You may be able to do so, however, on investment property or rental property.

Keep in mind that gains from the sale of one asset can be offset by losses on other asset sales up to $3,000 or your total net loss, and such losses may be eligible for carryover in subsequent tax years.

If you sell below-market to a relative or friend, the transaction may subject the recipient to taxes on the difference, which the IRS may consider a gift. Also, remember that the recipient inherits your cost basis for purposes of determining any capital gains when they sell it, so the recipient should be aware of how much you paid for it, how much you spent on improvement, and costs of selling, if any.

Are Real State Agent Commissions Tax Deuctible?

Yes. You can deduct realtor fees from the capital gains generated from that activity. In fact, any costs related to the sale of your home can be tax deductible. This can include legal and escrow fees, marketing and advertising costs, and staging fees.

Keep also in mind that the standard 6% commission paid by home sellers in the U.S. is disappearing under a pending settlement by the National Association of Realtors. Once new rules are in place by mid-July 2024, home sellers should see lower commissions.

Advisor Insight

Kimerly Polak Guerrero, CFP Polero ICE Advisers, New York, N.Y.

In addition to the $250,000 (or $500,000 for a couple) exemption, you can also subtract your full cost basis in the property from the sales price. Your cost basis is calculated by starting with the price you paid for the home, and then adding purchase expenses, such as closing costs, title insurance, and any settlement fees.

To this figure, you can add the cost of any additions and improvements you made with a useful life of over one year.

Finally, add your selling costs, like real estate agent commissions and attorney fees, as well as any transfer taxes you incurred.

By the time you finish totaling the costs of buying, selling, and improving the property, your capital gain on the sale will likely be much lower—enough to qualify for the exemption.

Taxes on capital gains can be substantial. Fortunately, the Taxpayer Relief Act of 1997 provides some relief to homeowners who meet certain IRS criteria. For single tax filers, up to $250,000 of the capital gains can be excluded, and for married tax filers filing jointly, up to $500,000 of the capital gains can be excluded. For gains exceeding these thresholds, capital gains rates are applied.

There are exceptions for certain situations, such as divorce and military deployment, as well as rules for when sales must be reported. Understanding the tax rules and staying abreast of tax changes can help you better prepare for the sale of your home. And if you’re in the market for a new home, consider comparing the best mortgage rates before applying for a loan.

Congress. “ H.R.2014 - Taxpayer Relief Act of 1997 .”

Internal Revenue Service. “ Topic No. 701 Sale of Your Home .”

Internal Revenue Service. “ Publication 523: Selling Your Home ,” Page 8.

Internal Revenue Service. “ Publication 523: Selling Your Home ,” Page 3.

Internal Revenue Service. " IRS Provides Tax Inflation Adjustments for Tax Year 2023 ."

Internal Revenue Service. “ Topic No. 409 Capital Gains and Losses .”

Internal Revenue Service. " Publication 523, Selling Your Home ," See "Widowed taxpayers."

Internal Revenue Service. “ Rev. Proc. 2022-38 ," Page 9.

Internal Revenue Service. “ Publication 523: Selling Your Home ,” Pages 3-4.

Congress. “ H.R.1 - An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018 .”

Internal Revenue Service. “ Like-Kind Exchanges - Real Estate Tax Tips .”

Internal Revenue Service. “ Publication 527: Residential Rental Property (Including Rental of Vacation Homes) ,” Page 3.

Internal Revenue Service. “ Instructions for Form 8824 (2022): Like-Kind Exchanges (and Section 1043 Conflict-of-Interest Sales) .”

Congress. “ American Jobs Creation Act of 2004: 118 Stat. 1597 ,” Page 181.

Internal Revenue Service. " Rev. Proc. 2008-16 ," Pages 4-5.

Internal Revenue Service. “ Frequently Asked Questions: Property (Basis, Sale of Home, etc.) 5 .”

Congress. “ H.R.3221 - Housing and Economic Recovery Act of 2008: Division C—Housing Assistance Tax Act of 2008 .”

Internal Revenue Service. “ Publication 537: Installment Sales ,” Page 2.

Internal Revenue Service. “ Publication 523: Selling Your Home ,” Page 9.

Internal Revenue Service. “ Publication 523: Selling Your Home ,” Page 10.

Internal Revenue Service. “ Frequently Asked Questions: Gifts & Inheritances .”

Internal Revenue Service. “ Instructions for Form 1099-S (01/2022) .”

Internal Revenue Service. “ Publication 523: Selling Your Home ,” Pages 4–5.

Internal Revenue Service. “ Publication 523: Selling Your Home ,” Pages 3, 15.

NAR. “ National Association of REALTORS Reaches Agreement to Resolve Nationwide Claims Broughtby Home Sellers .”

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Capital Gains Tax Calculator 2022-2023

Updated: Jan 5, 2023, 11:17am

You may have a capital gain or loss when you sell a capital asset, such as real estate, stocks, or bonds. Capital gains and losses are taxed differently from income like wages, interest, rents, or royalties, which are taxed at your federal income tax rate (up to 37% for the 2022 tax filing season). However, you may only pay up to 20% for capital gains taxes. And unlike ordinary income taxes , your capital gain is generally determined by how long you hold an asset before you sell it.

Use our capital gains calculator for the 2022-2023 tax season to determine how much tax you might pay on sold assets.

Calculator disclaimer: *Calculations are estimates based on the tax law as of September 2022. These rates are subject to change. Check the IRS website for the latest information about capital gains.

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Frequently Asked Questions (FAQs) About Capital Gains Tax

What are capital gains and losses.

A capital gain occurs when your capital asset, such as real estate, stocks, or bonds increases in value, whereas a capital loss occurs when the asset decreases in value. The gain or loss is taxable when the capital asset is sold.

What is the difference between short-term and long-term capital gain tax rates?

A short-term capital gain is the result of selling a capital asset you held in your possession for one year or less. Long-term capital gains are capital assets held for more than a year. Typically, you pay a higher tax rate on short-term capital holdings versus long-term ones.

Depending on how long you hold your capital asset determines the amount of tax you will pay. Short-term capital assets are taxed at your ordinary income tax rate up to 37% for 2022-2023 tax filing. Long-term assets are subject to capital gain tax rates, which are lower. When filing 2022 taxes, the top capital gain tax rate is 20%.

How do you treat capital loss tax on your tax return?

For tax purposes, your capital loss is treated differently than your capital gains. If you sell a capital asset at a loss, which typically means your selling price is less than its cost when you got the asset, you can claim a loss up to $3,000 ($1,500 if married separately) on your tax return. The amount reduces your taxable income and reduces the amount you may owe in taxes. If your loss exceeds these limits, you may carry it forward to later tax years.

How to report capital gains or losses on your tax return

You should report your capital gains or losses on Schedule D of your Form 1040 and transfer the reportable amount to Line 13 of your Form 1040.

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Kemberley Washington is a tax journalist and provides consumer-friendly tax tips for individuals and businesses. Her work goes beyond tax articles. She has been instrumental in tax product reviews and online tax calculators to help individuals make informed tax decisions. Her work has been featured in Yahoo Finance, Bankrate.com, SmartAsset, Black Enterprise, New Orleans Agenda, and more. She frequently appears on NBC's WDSU news broadcast.

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10 Essential Things to Know About Real Estate Assignment Sales (for Sellers)

What’s an assignment?

An assignment is when a Seller sells their interest in a property before they take possession – in other words, they sell the contract they have with the Builder to a new purchaser. When a Seller assigns a property, they aren’t actually selling the property (because they don’t own it yet) – they are selling their promise to purchase it, along with the rights and obligations of their Agreement of Purchase and Sale contract.  The Buyer of an assignment is essentially stepping into the shoes of the original purchaser.

The original purchaser is considered to be the Assignor; the new Buyer is the Assignee. The Assignee is the one who will complete the final sale with the Builder.

Do assignments only happen with pre-construction condos?

It’s possible to assign any type of property, pre-construction or resale, provided there aren’t restrictions against assignment in the original contract. An assignment allows a Buyer of a any kind of home to sell their interest in that property before they take possession of it.

Why would someone want to assign a condo?

Often with pre-construction sales, there’s a long time lag between when the original contract is entered into, when the Buyer can move in (the interim occupancy period) and the final closing. It’s not uncommon for a Buyer’s circumstances to change during that time…new job out of the city, new husband or wife, new set of twins, etc. What worked for a Buyer’s lifestyle 4 years ago doesn’t always work come closing time.

Another common reason why people want to assign a contract is financial. Sometimes, the original purchaser doesn’t have the funds or can’t get the financing to complete the sale, and it’s cheaper to assign the contract to a new purchaser, than it is to renege on the sale.

Lastly, assignment sales are also common with speculative investors who buy pre-construction properties with no intention of closing on them. In these cases, the investors are banking on quick price appreciation and are eager to lock in a profit now, vs. waiting for the original closing date.

What can be negotiated in an assignment sale?

Because the Assignee is taking over the original purchaser’s contract, they can’t renegotiate the price or terms of the contract with the Builder – they are simply taking over the contract as it already exists, and as you negotiated it.

In most cases, the Assignee will mirror the deposit that you made to the Builder…so if you made a 20% deposit, you can expect the new purchaser to do the same.

Most Sellers of assignments are looking to make a profit, and part of an assignment sale negotiation is agreeing on price. Your real estate agent can guide you on price, which will determine your profit (or loss).

Builder Approval and Fees

Remember that huge legal document you signed when you made an offer to buy a pre-construction condo? It’s time to take it out and actually read it.

Your Agreement of Purchase & Sale stipulated your rights to assign the contract. While most builders allow assignments, there is usually an assignment fee that must be paid to the Builder (we’ve seen everything from $750 to $7,000).

There may be additional requirements as well, the most common being that the Builder has to approve the assignment.

Marketing Restrictions

Most pre-construction Agreements of Purchase & Sale from Toronto Builders do not allow the marketing of an assignment…so while the Builder may give you the right to assign your contract, they restrict you from posting it to the MLS or advertising it online. This makes selling an assignment extremely difficult…if people don’t know it’s available for sale, how they can possibly buy it?

While it may be very tempting to flout the no-marketing rule, BE VERY CAREFUL. Buyers guilty of marketing an assignment against the rules can be considered to have breached the Agreement, and the Builder can cancel your contract and keep your deposit.

We don’t recommend advertising an assignment for sale if it’s against the rules in your contract.

So how the heck can I find a Buyer?

There are REALTORS who specialize in assignment sales and have a database of potential Buyers and investors looking for assignments. If you want to be connected with an agent who knows the ins and outs of assignment sales, get in touch…we know some of the best assignment agents in Toronto.

What are the tax implications of real estate assignment?

Always get tax advice from a certified accountant, not from the internet (lol).

But in general, any profit made from an assignment is taxable (and any loss can be written off). The new Buyer or Assignee will be responsible for paying land transfer taxes and any HST that might be due.

How much does it cost to assign a pre-construction condo?

In addition to the Builder assignment fees, you will likely have to pay a real estate commission (unless you find the Buyer yourself) and legal fees. Because assignments are more complicated, you can expect to pay higher legal fees than you would for a resale property.

How does the closing of an assignment work?

With assignment sales, there are essentially 2 closings: the closing between the Assignor and the Assignee, and the closing between the Assignee and the Builder. With the first closing (the assignment closing) the original purchaser receives their deposit + any profit (or their deposit less any loss) from the Assignee. On the second closing (between the Builder and the Assignee), the Assignee pays the remaining amount to the Builder (usually with the help of a mortgage), and pays land transfer taxes. Title of the property transfers from the Builder to the Assignee at this point.

I suppose it could be said that there is a third closing too, when the Buyer takes possession of the property but doesn’t yet own it…this is known as the interim occupancy period. The interim occupancy occurs when the unit is ready to be occupied, but not ready to be registered with the city. Interim occupancy periods in Toronto range from a few months to a few years. During the interim occupancy period, the Buyer occupies the unit and pays the Builder an amount roughly equal to what their mortgage payment + condo fees + taxes would be. The timing of the assignment will dictate who completes the interim occupancy.

Assignments vs. Resale: Which is Better?

We often get calls from people who are debating whether they should assign a condo they bought, or wait for the building to register and then sell it as a typical resale condo.

Pros of Assigning vs. Waiting

• Get your deposit back and lock in your profit sooner
• Avoid paying land transfer taxes
• Avoid paying HST
• Maximize your return if prices are declining and you expect them to continue to decline
• Lifestyle – sometimes it just makes sense to move on

Cons of Assigning vs Waiting

• The pool of Buyers for assignment sales is much smaller than the pool of Buyers for resale properties, which could result in the sale taking a long time, getting a lower price than you would if you waited, or both.
• Marketing restrictions are annoying and reduce the chances of finding a Buyer
• Price – What is market value? If the condo building hasn’t registered and there haven’t been any resales yet, it can be difficult to determine how much the property is now worth. Assignment sales tend to sell for less than resale.
• Assignment sales can be complicated, so you want to make sure that you’re working with an agent who is experienced with assignment sales, and a good lawyer.

Still thinking of assignment your condo or house ? Get in touch and we’ll connect you with someone who specializes in assignment sales and can take you through the process.

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Raj Singh says:

What can be things to look for, especially determining market value for an assigned condo? I’m the assignee.

Sydonia Moton says:

Y would u need a lawyer when u buy a assignment property

Gideon Gyohannes says:

Good clear information!

Who pays the assignment fee to the developer? Assignor or Assignee?

Thanks Gideon 416 4591919

Melanie Piche says:

It’s almost always the Seller (though I suppose could be a point of negotiation).

Fiona Rourke says:

If there are 2 names on the agreement and 1 wants to leave and the other wants to remain… does the removing of 1 purchaser constitute an assignment

Brendan Powell says:

An assignment is one way to add or remove people from a contract, but not the only way…and not the simplest. Speak to your lawyer for advice on what makes the most sense for your specific situation. For a straightforward resale purchase you could probably just do an amendment signed by all parties. If it’s a preconstruction purchase with various deposits paid, etc it could be more complicated.

Katerina says:

Depends on the Developer. Some of them remove names via assignments only.

Haroon says:

Is there any difference in transaction process If assigner or seller of a pre constructio condo is a non resident ? Is seller required to get a clearance certificate from cRA to complete the transaction ?

Nathalie says:

Hello , i would like to know the exact steps for reassignment property please.

Amazing info. Thanks team. I may just touch base with you when my property in Stoney Creek is completed in. 2020. I may need to reassign it to someone Thanks

Victoria Bachlowa says:

If an assignor renegs on the deal and refuses to close because they figured out they could get more money and the assignment was already approved by the builder and all conditions fulfilled what can the Assignee do. I have $33,000 dollars in trust in the real estate’s trust fund. They sent me a mutual release which I have not signed. The interim occupancy is Feb. 1 and the closing is schedule for Mar. 1, 2019. I have financing in place, was ready to move in Feb. 1 and I have no where to live.

Definitely talk to your lawyer right away. They’ll want to look at your agreement of purchase and sale and will be able to advise you.

With assignment sales, there are essentially 2 closings: the closing between the Assignor and the Assignee, and the closing between the Assignee and the Builder. With the first closing (the assignment closing) the original purchaser receives their deposit + any profit (or their deposit less any loss) from the Assignee. Can I assume that these closing happen at the same time? I’m not sure how and when I would be paid as the Assignor.

What happens to the deposits or any profits already paid if the developer cancels the project after an assignment?

Hi, Did you get answer to this? I did an assignment sale last year and now the builder is not completing apparently and they are asking for their money back. Can they do that? After legal transactions, the lawyer simply said “the deal didn’t go through”. Apparently builder and the person who assumed the assignment agreed on taking out the deal. What do I have to pay back after it was done a year ago

This is definitely a question for your lawyer – as realtors we are not involved in that part of the transaction. I would expect that just as the builder would have to refund your deposits, you would likely need to do the same…but talk to your lawyer. As to whether the builder can cancel a project, yes they always reserve that right (but the details of how and under what circumstances would be in your original purchase agreement). It’s one of the annoying risks in buying preconstruction!

I completed the sale of my assignment in Dec 2015 however the CRA says I should be reporting the capital income in 2016 when the assignee closed his deal with the developer in July 2016. That makes no sense to me since I got all my money in Dec 2015. Can you supply any clarification on that CRA policy please?

You’d have to talk to the CRA or an accountant – we’re real estate agents,so we can’t give tax advice.

Hassan says:

Hello, You said that there are two closings. The first one between the assignor and the assignee and the second one between the builder and the new buyer (assignee). My question is that in the first closing does the assignee have to pay the assignor the deposit they have paid and any profit in cash or will the bank add this to the assignee’s mortgage?

The person doing the assigning usually gets their money at the first closing.

Kathy says:

What is the typical real estate free to assign your contract with the builder ?

Hi Kathy While we do few assignments (as they are rarely successful, and builders do not make it easy), in past we have charged more or less the same as we do for a typical resale listing. While there are elements to assignments that should be easier than a resale (eg staging), many other aspects of assignments are much MORE time-consuming, and the risk much higher since attempts to find a buyer for assignments are often unsuccessful. It’s also important to note that due to the extra complication, lawyer’s fees to assign are typically higher than resale as well–although more $ for the purchase side vs the sale side.

Mitul Patel says:

If assignee has paid small amount of deposit plus the original 25% deposit that the assignor has paid to the builder and gets the Keys to the unit since interim possession has been completed, when the condo registration is done and assignee is getting mortgage from the Bank or Pays the remaining balance to the Builder using his savings and decides not to pay the Balance of the Profit amount to Assignor, what are the possibilities in this kind of scenario?

You’d need to talk to a lawyer to find out the options.

David says:

How much exactly do brokers get paid at sale of Assignment? i.e. Would the broker’s fee be a % of your assignment selling price or your home’s selling price? I’m really looking for a clear answer.

I am using this website’s calculator associated with selling your home in Ontario. But there is no information on selling assignments. https://wowa.ca/calculators/commission-calculator-ontario

Realtors set their own commission, so there is no set fee- that website is likely the commission that that agent offers. We often see commissions of 4-5% for assignments. The fee is a % of the price of the assignment – for example, you originally bought for $500K; you’re now assigning for $600K – commission would be payable on the $600K.

Candace says:

Question: if i bought a pre construction condo, can i sell it as soon as it closes or do i have to live in it for 1 year after closing in order to avoid capital gains taxes?

Or does the 1 year start as soon as you move in?

I would suggest you talk to your accountant re: HST credit implications and capital gains, but if you sell it for more than you paid for it, capital gains usually apply.

You mention avoid paying HST when you assign your property. What is the HST based on? It’s not a commercial property that you would pay HST. Explain. Thanks.

HST and assignments are complex and this question is best answered specific to your situation by your accountant and real estate lawyer. In some cases HST is applicable on assignment profits – more details can be found on the CRA website here:

https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/gi-120/assignment-a-purchase-sale-agreement-a-new-house-condominium-unit.html

If you are a podcast listener, the true condos podcast is also a great resource.

https://truecondos.com/cra-cracking-down-on-assignments/

heres one for your comment, purchase pre construction from builder beginning of 2021, to be finished end of 2021, (semi detached) here we are end of 2022, both units are now ready. Had one assigned but because builder didnt accept within certain time frame(they also had a 90 day clause wherein we couldnt assign prior to 90 less firm closing date (WHICH MOVED 4 TIMES). Anyrate now we have a new assinor but the builder says we are in default from the first one and wants 50k to do the assignment (the agreement lists the possibility of assigning for 12k) Also this deal would include us loosing our whole deposit and paying the 12k(plus fees) would be in addition too the 130k we are already loosing. The second property we are trying to close but interest rates are riducous, together with closing costs(currently mortgage company is asking that my wife be added to that one, afraid to even ask this builder. Any advice on how to deal with this asshole greedy builder? We are simply asking for assignment as per contract and a small extension for the new buyer(week or two) Appreciate any advice. Thank you

Dealing with builders/developers can be extremely painful, much worse than resale transactions in our experience. Their contracts are written to protect THEM. Unfortunately all I can say is follow the advice of your lawyer.

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Assignment of a Purchase and Sale Agreement for a New House or Condominium Unit

From: Canada Revenue Agency

Effective May 7, 2022, all assignment sales in respect of newly constructed or substantially renovated residential housing are taxable for GST/HST purposes. This publication will be updated to reflect this legislative change. For more information about the legislative amendment, refer to  GST/HST Notice 323, Proposed GST/HST Treatment of Assignment Sales .

GST/HST Info Sheet GI-120 July 2011

This info sheet explains how the GST/HST applies to the assignment of a purchase and sale agreement for the construction and sale of a new house.

The term "new house" used in this info sheet refers to a newly constructed or substantially renovated house or condominium unit. A house that has been substantially renovated is generally given the same treatment under the GST/HST as a newly constructed house. Extensive modifications must be made to a previously occupied house in order to meet the definition of a "substantial renovation" for GST/HST purposes. For a full explanation of the factors to consider in deciding if a substantial renovation has taken place, refer to GST/HST Technical Information Bulletin B-092, Substantial Renovations and the GST/HST New Housing Rebate .

In this publication, a house includes a single unit house, a semi detached house, a duplex, a rowhouse unit and a residential condominium unit (condo unit), but does not include a mobile home or floating home.

Where a person enters into a purchase and sale agreement with a builder for the construction and sale of a new house, the person may be entitled to assign their rights and obligations under the agreement to another person (an assignee). Generally, the result of the assignment is that the purchase and sale agreement is then between the builder and the assignee.

This publication addresses the situation where

• a purchaser (referred to as the first purchaser) enters into a purchase and sale agreement with a builder (Builder A) for the construction and sale of a new house, and
• the first purchaser subsequently assigns the agreement to an assignee (referred to as the assignee purchaser) before Builder A transfers possession or ownership of the house to the first purchaser and before any individual has occupied the house as a place of residence or lodging.

Generally, upon entering into an agreement for the construction and sale of a new house, the first purchaser is considered to have acquired an interest in the house. For GST/HST purposes, the assignment of the agreement to the assignee purchaser is normally considered to be a sale of the first purchaser's interest in the new house. The sale of an interest in a new house is generally taxable where the person selling the interest is a builder of the house.

For GST/HST purposes, the term "builder" is specifically defined and is not limited to a person who physically constructs a house. There are several instances in which an individual or other person is a builder for GST/HST purposes. For more information on persons who are included in the definition of "builder", refer to GST/HST Memorandum 19.2, Residential Real Property .

This info sheet addresses only whether a person is a builder as described in the following paragraph.

Primary purpose: selling the house or an interest in the house or leasing the house in certain circumstances

A builder includes a person who acquires an interest in a new house before it has been occupied by an individual as a place of residence or lodging for the primary purpose of selling the house or an interest in the house or leasing the house, other than to an individual who is acquiring the house otherwise than in the course of a business or adventure or concern in the nature of trade. When that person is an individual, the individual must acquire the interest in the course of a business or an adventure or concern in the nature of trade in order to be a builder described by this paragraph.

Even if a person is not a builder as described in the preceding paragraph, the person may be a builder based on one of the other definitions of the term as described in GST/HST Memorandum 19.2.

Assignment of a purchase and sale agreement by a person other than an individual

Where a person other than an individual (e.g., a corporation) is a builder as described in the section "Primary purpose: selling the house or an interest in the house or leasing the house in certain circumstances" and the person assigns a purchase and sale agreement for a new house, the person's sale of the interest in the house is subject to the GST/HST whether the sale takes place in the course of a business, an adventure or concern in the nature of trade, or otherwise.

Assignment of a purchase and sale agreement by an individual

If an individual enters into a purchase and sale agreement for one of the primary purposes described in the section "Primary purpose: selling the house or an interest in the house or leasing the house in certain circumstances", the sale of the interest in the house (or the house itself) is normally considered to be made in the course of an adventure or concern in the nature of trade or, depending on all of the surrounding circumstances, in the course of a business. If it is established that an individual is selling an interest in a new house in the course of a business or adventure or concern in the nature of trade, the individual is considered to have entered into the purchase and sale agreement for the primary purpose of selling the house or an interest in the house.

Whether the activity of acquiring an interest in a house, as a result of entering into a purchase and sale agreement, is done in the course of a business or an adventure or concern in the nature of trade is a question of fact. For more information on how to determine whether an activity is done in the course of a business or an adventure or concern in the nature of trade, refer to Appendix C of GST/HST Memorandum 19.5, Land and Associated Real Property .

Factors in determining the primary purpose

All of the relevant factors surrounding entering into a purchase and sale agreement should be considered in determining the primary purpose for a person's acquisition of an interest in a new house.

The following factors may indicate that, for GST/HST purposes, a person entered into a purchase and sale agreement for the primary purpose of selling an interest in the new house or the house itself. The factors are not listed in any particular order and there is no intent to weigh one more heavily than another.

• The person offers to sell their interest in the house or takes other actions to attract buyers before, or while, the house is under construction.
• The person finances the purchase of the house by a short-term mortgage, or an open mortgage that can be paid off without penalty, rather than by a long-term or closed mortgage.
• Financing of the house is beyond the person's means and that person is relying on the increased value and saleability of the house, or an interest in the house, in a rising housing market.
• The person is an individual and their stated intention to occupy the house as a place of residence is not supported by the circumstances of the case. For example, an individual has a family of four and enters into a purchase and sale agreement for a one-bedroom condo unit where they are not contemplating any changes in family circumstances.
• The person's pattern of activity is such that their occupancy of the house does not have the qualities or characteristics of being permanent. For example, the person purchases more than one house at or around the same time. This factor may be given extra weight where the person has previously entered into a purchase and sale agreement for purposes of selling the house or an interest in the house. There are no outward indicators to support a contrary primary intention (i.e., an intention contrary to an intention of resale). For example, an individual is selling a condo unit, one or more of the above factors are present, there are no physical actions or evidence that the individual's primary intention was to live in the condo unit, use it as a vacation home, or rent it to another individual for use as their place of residence, and no evidence that the sale of the condo unit was triggered by some unforeseen event.

In order for the acquisition of an interest in a new house to be for one of the primary purposes described in the section "Primary purpose: selling the house or an interest in the house or leasing the house in certain circumstances", the intention to sell the house or an interest in it, or to lease the house in the manner described in that section, must have existed at the time of acquiring the interest. Nonetheless, the intention at the time of acquisition may be demonstrated over a period of time.

If an individual acquired an interest in the house for the primary purpose of using it as a place of residence, the person is not considered to be a builder of the type described in this info sheet even if, at a later point in time, the person sells the house or an interest in the house. However, the person may still be a builder if the person meets one of the other definitions of that term as described in GST/HST Memorandum 19.2.

The following examples illustrate when a person may or may not be a builder of a new house.

Sarah, Francine, and Angela are roommates renting a three-bedroom house. They entered into a purchase and sale agreement with a builder in January 2010 for a one-bedroom condo unit in a new condominium complex that was to be built. The purchase price under the agreement was $300,000 and the closing date was July 31, 2013.

In March 2011, the fair market value of the new condo unit had increased by 50%. They entertained several offers for the sale of their interest in the condo unit before assigning it to James. No individual had occupied the condo unit as a place of residence or lodging when they sold their interest in the unit. They split the proceeds, which they each used as a down payment to buy their own homes.

As it would not be practical for the three individuals to live in the condo unit together, they considered several offers for their interest in the unit, and there are no indicators to support a contrary intention, Sarah, Francine and Angela are considered to have acquired their interest in the condo unit for the primary purpose of selling the unit or an interest in it. The sale is considered to be made in the course of a business or adventure or concern in the nature of trade. Accordingly, Sarah, Francine, and Angela are all builders of the condo unit for GST/HST purposes. As they are builders of the unit and the sale of their interest in the unit is not exempt, GST/HST applies to the sale of each of their interests.

Pascal and Chantal own a four-bedroom house where they live with their three children. This is the only home they have ever owned and lived in. They have never purchased any other real property.

In June 2009, they entered into a purchase and sale agreement with a builder for a 1-bedroom condo unit in a new high-rise condominium complex that was to be built. The purchase price under the agreement was $275,000 and the closing date was June 30, 2010. In May 2010, they sold their interest in the new condo unit for $400,000 before it had been occupied by any individual as a place of residence or lodging. They used the sale proceeds to build an addition to their current home.

Although Pascal and Chantal have no history of buying and selling real property, it would not be practical for their family of five to occupy the condo unit as their place of residence. Lacking evidence to support a contrary intention, their primary purpose in acquiring the interest in the condo unit is considered to be for the purpose of selling the condo unit or an interest in it in the course of a business or an adventure or concern in the nature of trade. Accordingly, they are builders of the new condo unit for GST/HST purposes. As the sale of their interest in the unit is not exempt, GST/HST applies to the sale of their interest.

Eric and Gina owned a 3-bedroom house where they lived with their 3 children. They entered into a purchase and sale agreement with a builder in October 2010 to purchase a new 4-bedroom house that was to be built. They intended to use the new house as their primary place of residence as it was located much closer to the children's school and to Eric and Gina's workplaces and had more space. The closing date is July 31, 2011.

Eric and Gina sold their current home in January 2011 and moved into a rented home they planned to live in until their new house was ready. However, in June 2011, Gina's mother became ill and moved in with them as she was no longer able to live on her own.

Eric and Gina decided that the new house would no longer be large enough and that they would now need a house with a granny suite. They sold their interest in the new 4-bedroom house so that they could buy a bigger home that would suit their changed needs.

Eric and Gina's sale of their original home and temporary move to a rented house during the construction of the new home and their choice to purchase a home located closer to school and work support that their intention in acquiring the interest in the new house was to use the house as their primary place of residence. Given this, and the fact that their only reason for selling the interest was due to a change in personal circumstance (i.e., the new house would no longer accommodate their family's needs), they are not considered to have acquired the interest in the house for the primary purpose of selling it. Accordingly, they are not builders of the new house for GST/HST purposes and the sale of their interest in the house is exempt.

Cindy entered into a purchase and sale agreement with a builder in November 2010 for a new house that was to be built. She intended to use the house as her primary place of residence. Her new home would be located within walking distance from her workplace and would be closer to her family than the apartment she is currently renting. The closing date for the purchase is September 30, 2011.

In July 2011, Cindy's employer announced that it was relocating to another city located three hours away. To keep her current job, Cindy had to move to that city. She sold her interest in the house to John.

Since Cindy had intended to use the house as her primary place of residence and her only reason for selling her interest in the house was due to work relocation, she did not acquire the interest in the house for the primary purpose of selling it. Therefore she is not a builder of the house for GST/HST purposes and the sale of her interest in the house is exempt.

Assignment fees

The consideration charged for the sale of an interest in a house generally includes amounts that a person paid to a builder (e.g., a deposit) and that the person wants to recover when assigning their interest in the house. The sale price for the interest may also include a profit, i.e., an amount over and above amounts the person had paid to the builder. If a person's sale of their interest to an assignee purchaser is taxable, the total amount payable for the sale of the interest is subject to GST/HST, including any amount the person paid as a deposit to the builder, whether or not such an amount is separately identified.

A first purchaser enters into a purchase and sale agreement for a new house with a builder (Builder A) and pays a deposit of $10,000 at that time. The first purchaser does not make any further payments to Builder A. The first purchaser subsequently assigns the agreement to an assignee purchaser for $15,000. If the sale of the interest in the house from the first purchaser to the assignee purchaser is subject to GST/HST, tax applies to the full $15,000. This is the case even if the assignment agreement identifies that the $10,000 is a recovery of the deposit that the first purchaser paid to Builder A.

The assignment of a purchase and sale agreement for a new house may be subject to the approval of the builder with whom the first purchaser originally entered into the agreement to construct and sell the new house. The agreement may list conditions related to the first purchaser's right to assign the agreement to an assignee purchaser and, in many cases, the builder charges a fee to the first purchaser for the assignment of the agreement to another person.

The fee charged by the builder in such circumstances is generally subject to the GST/HST.

Eligibility for a GST/HST new housing rebate and provincial new housing rebate (where applicable) where a purchase and sale agreement is assigned

The GST/HST new housing rebate, and where applicable, a provincial new housing rebate, may be available for a new house purchased from a builder and for owner-built new housing. Guide RC4028, GST/HST New Housing Rebate , sets out the eligibility criteria for both types of GST/HST new housing rebates and provincial new housing rebates.

If the first purchaser (the assignor) makes a taxable sale of an interest in a house, i.e., the first purchaser is a builder and assigns the purchase and sale agreement to an assignee purchaser, the first purchaser would not be eligible for either a GST/HST new housing rebate or provincial new housing rebate as they did not acquire the house for use as their primary place of residence. Even if the sale of the interest in the house by the first purchaser is not subject to GST/HST (i.e., in situations where the first purchaser is not a builder of the house), the first purchaser would generally not be eligible for either a GST/HST new housing rebate or a provincial new housing rebate as the conditions for claiming the rebates are not met (e.g., ownership of the house would not transfer to the first purchaser, but to the assignee purchaser).

The assignee purchaser, if an individual, may be eligible for a GST/HST new housing rebate, and where applicable a provincial new housing rebate, where the assignee purchaser receives an assignment of a purchase and sale agreement for a new house. The assignee purchaser would have to meet the eligibility conditions for the rebates as set out in Guide RC4028.

Where a purchase and sale agreement for a new house is assigned, there may be two builders of the house – the original builder (Builder A) and the first purchaser (the assignor). If that is the case, an assignee purchaser would generally have to pay the GST/HST to Builder A for the purchase of the new house and to the first purchaser for the purchase of the interest in the new house.

Claiming a GST/HST new housing rebate when there is more than one builder

In some cases, the builder of a new house pays or credits the amount of the GST/HST new housing rebate, and where applicable, a provincial new housing rebate, to the purchaser of the house. In this case, the builder credits the amount of the new housing rebates to the purchaser by reducing the total amount payable for the purchase of the house by the amount of the expected rebates.

Where this happens, the purchaser and the builder have to sign Form GST190, GST/HST New Housing Rebate Application for Houses Purchased from a Builder , and the builder has to send the form to the Canada Revenue Agency (CRA). As the purchaser receives the amount of the rebate from the builder, the builder may claim the amount as a credit against its net tax when it files its GST/HST return.

Only one new housing rebate application can be made for each new house. Therefore, an assignee purchaser cannot submit a rebate application through a builder (Builder A) for the tax paid to Builder A on the purchase of the house and submit a second rebate application through the first purchaser (the assignor), or directly to the CRA, for the tax paid to the first purchaser on the purchase of the interest in the house.

In such cases, the assignee purchaser may want to file their new housing rebate application directly with the CRA rather than through Builder A. In this way, the assignee purchaser can include in the new housing rebate application the tax paid to Builder A and the tax paid to the assignor in determining the amount of their GST/HST new housing rebate and, where applicable, a provincial new housing rebate.

This info sheet does not replace the law found in the Excise Tax Act (the Act) and its regulations. It is provided for your reference. As it may not completely address your particular operation, you may wish to refer to the Act or appropriate regulation, or contact any CRA GST/HST rulings office for additional information. A ruling should be requested for certainty in respect of any particular GST/HST matter. Pamphlet RC4405, GST/HST Rulings – Experts in GST/HST Legislation explains how to obtain a ruling and lists the GST/HST rulings offices. If you wish to make a technical enquiry on the GST/HST by telephone, please call 1-800-959-8287.

Reference in this publication is made to supplies that are subject to the GST or the HST. The HST applies in the participating provinces at the following rates: 13% in Ontario, New Brunswick and Newfoundland and Labrador, 15% in Nova Scotia, and 12% in British Columbia. The GST applies in the rest of Canada at the rate of 5%. If you are uncertain as to whether a supply is made in a participating province, you may refer to GST/HST Technical Information Bulletin B-103, Harmonized Sales Tax – Place of Supply Rules for Determining Whether a Supply is Made in a Province .

If you are located in Quebec and wish to make a technical enquiry or request a ruling related to the GST/HST, please contact Revenu Québec at 1-800-567-4692. You may also visit the Revenu Québec Web site to obtain general information.

All technical publications related to GST/HST are available on the CRA Web site at www.cra.gc.ca/gsthsttech .

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How Are Capital Gains Taxed?

Delving into the labyrinth of capital gains taxation unveils a complex web of financial intricacies that every investor must navigate. When investments appreciate and are sold, they become subject to taxation, with the treatment of these gains varying based on factors like how long you owned the investment and how much taxable income you have that year. Understanding the intricacies of how capital gains are taxed is essential for anyone looking to minimize taxes, while staying compliant with the IRS rules. 

Let’s look at a few key questions to about the taxation of capital gains. 

What are capital gains?

Any time you sell an investment for more than you bought it, you potentially create a taxable capital gain. Capital gains can apply to almost any investment that is sold at a profit, such as stocks, bonds, real estate, precious metals, options contracts, or even cryptocurrency. 

When you sell an investment at a profit, the difference between the selling price and the purchase price (a.k.a cost basis) is considered a capital gain. Fortunately, you can potentially reduce the gain you realize a bit by including certain expenses like the costs incurred to sell the asset. 

Learn more about calculating your capital gains taxes: Save on Taxes: Know Your Cost Basis .

Are all investment sales subject to capital gains taxes?

No, there are many times when selling an asset does not result in a taxable gain. Capital gains taxes generally only apply to assets held in a taxable account like a bank or brokerage account. Assets held in tax-advantaged accounts, such as an IRA or 401(k), avoid capital gains taxes on the sale of an asset. 

How are capital gains taxed?

At the federal level, capital gains are taxed based on the several factors including the type of asset, how long you held the asset, and your overall income level. 

If you only held the investment for a year or less, then the short-term capital gains tax rates will apply. These tax rates and brackets are the same as those applied to ordinary income, like your wages, and currently range from 10% to 37% depending on your income level.

• Tax rate Tax rate -->
• Taxable income bracket Taxable income bracket -->
• Tax rate -->
• Taxable income bracket Single filer -->
• Taxable income bracket Married filing jointly -->
• Taxable income bracket Married filing separately -->
• Taxable income bracket Filing head of household -->
• Tax rate 0% -->
• Taxable income bracket Standard or itemized deduction amount -->
• Tax rate 10% -->
• Taxable income bracket $0 – $11,600 -->
• Taxable income bracket $0 – $23,200 -->
• Taxable income bracket $0 – $16,550 -->
• Tax rate 12% -->
• Taxable income bracket $11,601 – $47,150 -->
• Taxable income bracket $23,201 – $94,300 -->
• Taxable income bracket $16,551 – $63,100 -->
• Tax rate 22% -->
• Taxable income bracket $47,151 – $100,525 -->
• Taxable income bracket $94,301 – $201,050 -->
• Taxable income bracket $63,101 – $100,500 -->
• Tax rate 24% -->
• Taxable income bracket $100,526 – $191,950 -->
• Taxable income bracket $201,051 – $383,900 -->
• Taxable income bracket $100,501 – $191,950 -->
• Tax rate 32% -->
• Taxable income bracket $191,951 – $243,725 -->
• Taxable income bracket $383,901 – $487,450 -->
• Taxable income bracket $191,951 – $243,700 -->
• Tax rate 35% -->
• Taxable income bracket $243,726 – $609,350 -->
• Taxable income bracket $487,451 – $731,200 -->
• Taxable income bracket $243,726 – $365,600 -->
• Taxable income bracket $243,701 – $609,350 -->
• Tax rate 37% -->
• Taxable income bracket $609,351 or more -->
• Taxable income bracket $731,201 or more -->
• Taxable income bracket $365,601 or more -->
• Taxable income bracket $609,350 or more -->

On the other hand, if you held the investments longer than a year, long-term capital gains tax rates will apply and any gains are subject to lower preferential tax rates, ranging from 0% to 20% depending on your income level. 

• Taxable income bracket $0 – $47,025 -->
• Taxable income bracket $0 – $94,050 -->
• Taxable income bracket $0 – $63,000 -->
• Tax rate 15% -->
• Taxable income bracket $47,026 – $518,900 -->
• Taxable income bracket $94,051 – $583,750 -->
• Taxable income bracket $47,026 – $291,850 -->
• Taxable income bracket $63,001 – $551,350 -->
• Tax rate 20% -->
• Taxable income bracket $518,901 or more -->
• Taxable income bracket $583,750 or more -->
• Taxable income bracket $291,850 or more -->
• Taxable income bracket $551,350 or more -->

Additionally, high-income earners may also be subject to the net investment income tax (NIIT), which adds an extra 3.8% tax on investment income, including capital gains, for individuals with modified adjusted gross income (AGI) above certain thresholds. 

• Additional 3.8% tax if income is above the limits below  Additional 3.8% tax if income is above the limits below  -->
• Additional 3.8% tax if income is above the limits below Additional 3.8% tax if income is above the limits below -->
• Additional 3.8% tax if income is above the limits below  Single filer -->
• Additional 3.8% tax if income is above the limits below  Married filing jointly -->
• Additional 3.8% tax if income is above the limits below Married filing separately -->
• Additional 3.8% tax if income is above the limits below  Filing head of household -->
• Tax rate AGI limits -->
• Additional 3.8% tax if income is above the limits below  $200,000 -->
• Additional 3.8% tax if income is above the limits below  $250,000 -->
• Additional 3.8% tax if income is above the limits below $125,000 -->

And remember, state taxes could also apply. Each state has its own rules about how the gains are taxed, and some states don’t tax these gains at all. 

Are there any unique capital gains tax rules?

There are many other asset classes out there with their own unique tax rules. For instance, futures contracts, options on futures, options on broad-based indexes, and collectables (which includes metals like gold) are subject to a special tax treatment.  

Derivative contracts like futures contracts, options on futures, or options on broad-based indexes, are subject to Internal Revenue Code section 1256 (a.k.a 1256 contracts). These types of assets get special tax treatment called the 60/40 rule, where 60% of gains are taxed at the lower long-term capital gains rate and 40% at the ordinary income tax rate. In addition, if you hold section 1256 contracts, they're subject to the mark-to-market rule . If you hold these assets through the end of a calendar year, you'll have to recognize an unrealized gain or loss based on the fair market value on December 31. 

Gains from the sale of collectibles, such as art, antiques, coins, and precious metals, are subject to a higher long-term capital gains tax rate of 28%. Whereas shorter-term gains on collectables are taxed at the ordinary income tax rates.

How are cryptocurrencies treated when it comes to taxes?

Cryptocurrencies are taxed a bit different than most people expect. While cryptocurrencies, like bitcoin, are often thought of as digital currencies, the IRS disagrees. The IRS does not consider them to be a currency; in the IRS’s eyes, they are "property," which means cryptocurrencies are subject to the same long- and short-term capital gains tax rates as other investments. 

When you sell or trade cryptocurrencies for another asset (or even for a different cryptocurrency), you create a taxable event, and any gain realized needs to be reported on your tax return. Even if you don’t get a Form 1099 for a cryptocurrency transaction, it still needs to be reported on your tax return. Also be aware that using cryptocurrency to buy goods or services is also a taxable event because you exchanged the cryptocurrency for something. 

What happens if I realize a capital loss on a sale?

No one likes losing money, but sometimes, losses are unavoidable. If you sell an investment for less than you paid for it, a capital loss has been realized. Fortunately, investment losses have a silver lining; you can use capital losses to offset other capital gains, reducing your overall tax bill. If total capital losses exceed your capital gains, you can deduct up to $3,000 of the excess losses against other types of income, such as wages. Any remaining losses beyond the $3,000 deduction can be carried forward to offset future income. 

The tax benefits from capital losses are often good enough that many tax savvy investors regularly look for losses in their portfolios so they can use them to reduce their taxes in a process known as tax-loss harvesting . But you do have to be careful when strategically realizing losses to avoid the wash sale rule , which could reduce or remove the potential tax benefits of loss harvesting.

Could tax rates for long-term gains change?

It's always possible. In the end, Congress writes the tax laws, so it always has the option to change the tax rates and brackets. For example, back in the late 1970s, the maximum long-term capital gains rate rose to near 40% for some investors with the biggest gains. That’s why meeting with your tax and financial advisor at least once a year is important because they’re tracking those changes and can help update your wealth management plan accordingly. 

Bottom line

Navigating the complexities of capital gains taxes is crucial for investors seeking to optimize their overall wealth management strategy. Understanding the various tax rates, holding periods, and special rules for different asset classes can significantly impact your tax liabilities and investment decisions. Given the intricacies involved, it's prudent to seek professional guidance from a tax professional and/or a financial planner to get personalized advice tailored to your specific circumstances. 

Ready to invest tax-efficiently?

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The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

Investing involves risk, including loss of principal.

The information and content provided herein is general in nature and is for informational purposes only. It is not intended, and should not be construed, as a specific recommendation, individualized tax, legal, or investment advice. Tax laws are subject to change, either prospectively or retroactively. Where specific advice is necessary or appropriate, individuals should contact their own professional tax and investment advisors or other professionals (CPA, Financial Planner, Investment Manager) to help answer questions about specific situations or needs prior to taking any action based upon this information.

Schwab does not provide tax advice. Clients should consult a professional tax advisor for their tax advice needs. 

CRA Pursuing Tax on Assignments – Proceed with Caution!

Income tax on assignment sales:.

The recent 2019 Federal Budget announced that CRA will be devoting significant resources to pursue and investigate real estate transactions as the Department of Finance feels that this is a significant area of non-compliance.  What that means is that if you are involved in a pre-construction assignment sale, there is a high likelihood that you will be subject to CRA scrutiny, so it is important that taxpayers understand the rules for both income tax and HST relating to assignment sales.

Many taxpayers assume that the sale of real estate results in a capital gain, but what they don’t realize is that it is not the nature of the property, but the intent of the buyer at the time of purchase that determines if the property is capital or inventory.  If it is determined that the intention of the taxpayer at the time of purchase was to resell the property for a profit, then the proceeds would be considered business income which has a 100% inclusion rate as opposed to a 50% inclusion rate for capital gains.  CRA has been attacking assignment sales on the basis that they are short-term transactions that are often undertaken by individuals looking to make a quick profit on the “flip”.  Taxpayers who have a history of flipping properties in a short time frame will have a difficult time justifying that their investment is capital property and will likely be reassessed quickly by CRA. If you plan to treat your assignment sale as a capital gain, you should ensure that the facts support your claim that you intended to hold on to the property long-term either as a personal use property or as an income producing property .  There have been recent tax court cases where the judge dismissed the taxpayers claim that the real estate was capital property because the facts did not support their claim and they were assessed taxes on the sale as business income.

Some taxpayers also make the mistake of assuming that because they originally purchased a pre-construction unit with the intention of living in it as a principal residence, that it qualifies for the principal residence exemption (PRE) and therefore is not taxable.  This is not the case in an assignment sale because the rights to the property have been sold prior to closing, so the property was never inhabited as a principal residence and therefore cannot qualify for the PRE. There have been several cases of CRA applying gross negligence penalties to unreported real estate transactions. So with the increased attention that assignment sales will be receiving, it is important to be getting proper tax advice on how to report these types of sales.

H.S.T. on Assignment Sales:

If the income tax implications of assignment sales were not enough to think about, you also have to think of HST on an assignment sale. Like income tax, much depends on the intent of the buyer at the time the contract was entered into. CRA’s position is that if a person buys a property for the primary purpose of selling the house or interest in the house then that person will be considered a Builder under the Income Tax Act. Yes, you read that right, the CRA will consider you a Builder under the Income Tax Act even if you have  never built a home, if it concludes that you purchased a property for the primary purpose of selling it or an interest in it. Once you are considered a builder you must charge HST on the transaction. Believe it or not, the official position of CRA is that you must charge any applicable HST on the profit being made and the deposits. So, for example, if you had put down $50,000 in deposits on a property and made a further profit of $50,000 as an assignment fee, CRA’s position is that 13% HST is payable on $100,000 [this has been challenged successfully with HST being found to only apply to the assignment fee/profit, but CRA’s position remains that it is payable on the total of the profit plus deposits]. Under most contracts HST is included in the purchase price to the assignee/final buyer so this would have to be paid by the seller/assignor.

The link below sets it all out:

https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/gi-120/assignment-a-purchase-sale-agreement-a-new-house-condominium-unit.html

Get the right advice and use the right clauses:

The bottom line of all of this is that before you purchase the condo, you should think carefully about the possible tax implications, and make sure that you properly document the history and reasons for your purchase and use the appropriate clauses to minimize your tax implications. Consideration of tax implications is always part of our Assignment review. Please feel free to contact us and we can direct you in this regard.

Our firm focuses on Real Estate.   We have been working with agents and brokers for over 25 years and have developed an efficient and responsive Real Estate practice.  We also offer fixed purchase closing costs of $999.00* for all Fees & Disbursements, plus Title Insurance . *Plus H.S.T. For details, or with any questions, please feel free to call John Zinati at 416-321-8766 , email at [email protected] or visit us at www.zinatikay.com .

Everything you need to know about Preconstruction Assignment Sales

Have you sold pre-construction homes before closing on assignments?

Have you wondered about what are the tax implications on selling pre-construction homes before closing?

We often advise our clients to not to sell their pre-construction homes before closing if possible.  It can trigger a series of tax implications – HST and income tax implications. 

Before the announcement of Budget 2022, CRA had adopted the policies that HST would be applicable on not just the assignment fees, but also the deposit. 

This could be a huge tax cost that most investors weren’t aware of.

Now, let’s use an example to explain .

Say you agree to purchase a pre-construction home for $700,000.  You sign the agreement of purchase and sale and pay a deposit of $100,000 to the builder. 

The new home is expected to be completed a few years later.

You decided to sell the property on assignment before it’s ready for closing for an additional $50,000.

Scenario 1:  When you signed the agreement of purchase and sale, you intended to move into the property and use it as your primary residence.  

Life circumstances change.  You now decided to sell the property before closing.  You sold it on assignment before May 6, 2022 .

HST: As your intention was to move into the property as your primary residence, you had no HST liability obligation.

Again, intention is subjective.  If you’re questioned in court, you would have to provide evidence to prove your own intention. 

Most clients thought that the CRA would have to prove that they were wrong.  The truth however is that the taxpayers are the one who have the responsibility to prove to CRA their own filing position. 

Make sure your have documentation proving your initial intention.   

Income Tax: Assuming you have strong documentation proving that you did intend to purchase this pre-construction home as your primary residence, the $50,000 assignment fees could be reported as capital gain.

Scenario 2:  When you signed the agreement of purchase and sale, you intended to move into the property and use it as your primary residence.  

Life circumstances change.  You now decided to sell the property before closing.  You sold it on assignment after May 6, 2022 .

Budget 2022 changed the rule.  For all assignment sales happened after May 6, 2022, regardless of your intention, you’re required to pay HST on the assignment sales.

HST implication:

This means that the $50,000 collected is no longer all yours.  This $50,000 collected, if you don’t charge HST on top, is inclusive of HST.  

You must remit the HST to CRA on sale on assignment.  In this case, it would have been $5.8K. 

Presumably, you would also be able to claim Input Tax Credit, which is the HST you paid on services that you used to allow you to sell the property.  This includes the HST you paid on your legal cost and HST you paid on brokerage fees. 

The net amount can be remitted to CRA.

Income Tax Implication:

Budget 2022 also made some rule changes when it comes down to sale of property.  The sale of a property within one year of ownership is considered on income account, meaning 100% of the profit you make is taxable, with some exceptions allowed, effective Jan 1, 2023.

When you apply this new rule to this scenario, it is unknown as to whether an assignment sale is considered a flipped property.  It’s difficult to say whether this rule is applicable to assignment sale at this point.

Regardless, you still would need to keep proper and relevant documentation supporting your intention that you were trying to move into the property as your primary residence.  With proper documentation, you could still report the net income from assignment sale on capital account, meaning only 50% of the profit you make is taxable.

In our example, assuming client didn’t incur other cost of selling, the client would be reporting $44K of capital gain, 50% of which would be taxable.

Scenario 3:  When you signed the agreement of purchase and sale, you intended to rent out your property.  

Interest rate changed.  You now decided to sell the property before closing.  You sold it on assignment before May 6, 2022 .

Your intent was never to move into the property as your primary residence or have any of your family members moving in, as a result HST is applicable on assignment sale.

Assignment fees are subject to HST. $50,000 assignment fees you collected are subjected to HST.

CRA also adopted the position that the deposits $100K are also subject to HST as well.  Ouch!

You thought you made $50,000 – but after considering the HST on assignment fees $5.8K and HST on deposits $11.5K, you really only net $33K.

This calculation hasn’t considered the brokerage fees as well as the lawyer fees yet.  Yikes!

Income Tax implication:

The net amount profit of $33K (assuming there’s no brokerage fees or lawyer fees, if you have, the net profit is lower) would likely have to be reported as income, 100% of it is taxable. 

If you own the property in your personal name, the entire amount is added to your job income or whatever income you have in your personal name.  You’re taxed at the respective marginal tax rates, which can be as high as 53.5% in Ontario.

Triple Yikes!

If you own the property in the corporation, the profit is taxed as regular business income, most likely at 12.2% for qualified small businesses. 

Scenario 4:  When you signed the agreement of purchase and sale, you intended to rent out your property.  

Interest rate changed.  You now decided to sell the property before closing.  You sold it on assignment AFTER May 12, 2022 .

The Government also recognized that charging HST on deposits were not right.  Budget 2022 specified that HST would no longer be charged on deposits .

Assignment fees are subject to HST but deposits are not subject to HST anymore to avoid double taxation.

Assignment fees are reported as income 100% taxable.

So continuing with the same example, HST is applicable on the $50,000 assignment fees, meaning that you would incur HST liability of $5.8K as calculated above. 

Again, you could offset the HST liability with the HST you pay on realtor commission as well as lawyer fees on closing. 

The net amount would have to be paid to CRA.

The net profit of $44K (assuming there’s no brokerage fees or lawyer fees, if you have, the net profit is lower) would likely have to be reported as income, 100% of it is taxable. 

Similar to Scenario 3, if you own the property in your personal name, the entire amount is added to your job income or whatever income you have in your personal name.  You’re taxed at the respective marginal tax rates, which can be as high as 53.5% in Ontario.

Now that we’ve gone through the assignment sales tax implication in details – Are you still planning to sell your properties on assignment?

Let us know below.

Lastly, our team has been working tirelessly to prepare for the upcoming Wealth Hacker Conference on preparing everyone for the upcoming recession.  We have experts such as Dalia sharing her insights on how to protect your portfolio and grow from this recession.  If you are lost, join us at the upcoming Wealth Hacker Conference.  

Visit WealthHacker.ca now to get your tickets. 

Until next time, happy Canadian Real Estate Investing.

Cherry Chan, CPA, CA

Your Real Estate Accountant

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Tax on Assignment Sales: What You Need to Know

Real estate assignment sales and flipping pre-construction condos have become popular strategies for investors looking to make a quick return. And CRA has noticed. In this blog, I will explain two ways CRA is cracking down on pre-construction investors and what you can do to minimize your tax paid on assignment sales.

#1 – CRA May Tax Assignment Sales as Business Income

Similar to selling a resale home, you are required to report an assignment sale on your tax return and pay the necessary tax. Many real estate investors are quick to assume that the profit from an assignment sale is a capital gain.

However, CRA may tax assignment sales in two ways:

• Capital gain – where only 50% of the profit is taxable
• Business income – where 100% of the profit is taxable

To make its determination, CRA will consider factors such as:

• What was your motive or intention in buying the property?
• How long did you hold the property before selling?
• Do you have a history of similar transactions?
• What is your reason for selling?

Based on past court cases, we know that CRA will generally consider the profit from assignment sales to be business income unless you have a compelling explanation.

With the potential to double its tax collection, you can bet that CRA is watching this closely!

#2 – CRA May Assess GST/HST on Assignment Sales

This is probably one of the most overlooked tax implications when it comes to assignment sales.

While resale homes are generally exempt from GST/HST, you may be surprised to learn that this may not be the case with assignments.

Similar to income tax, CRA will look at your intentions in buying the property to determine whether GST/HST applies to you.

For example, you are likely considered a “builder” and will have to charge GST/HST if you assign a pre-construction unit that you bought for the purpose of flipping to make a quick profit.

And it gets worse:

Not only do you have to charge GST/HST on your profit, you also have to charge GST/HST on the deposit you recoup from the buyer!

Since most real estate contracts embed GST/HST into the sales price, this cost will likely be borne by the assignor.

Let’s look at an example:

Scenario Luca purchased a pre-construction condo unit for $450,000 a couple of years ago. He paid a deposit of $90,000 to the builder. The unit is currently worth $575,000. Luca had always planned to buy this unit as an investment and assign it for a profit. He has a personal tax rate of 50%.

On the surface, it looks like Luca stands to make a great profit. But, let’s see how that holds up:

What Can You Do to Save Tax on Assignment Sales?

Firstly, if you are unsure whether you have a capital gain or business income, you should reach out to a tax professional for advice.

Secondly, if the profit on your assignment sale is in fact business income because of the factors discussed above, then you should consider incorporating.

The benefit here is that business income is usually taxed at low rates inside a corporation (about 12.2% in Ontario and 11% in British Columbia). This is much lower than the the top tax rate of 53% paid by individuals.

Now be warned:

Setting up a corporation for real estate investing is not for everyone. Be sure to consult with a tax professional before implementing this strategy.

Lastly, it is important to work with an experienced real estate lawyer to discuss your GST/HST options. In my experience, it may be possible to restructure an assignment sale to reduce the GST/HST you pay as an assignor.

In Luca’s case, with the right professionals on his team, he was able to restructure the deal to reduce his taxes by about 38% (50% less 12.2%), pay less GST/HST and put this money into his next real estate project.

Have qu estions about flipping pre-construction real estate? Contact us for a consultation.

The content of this blog is intended to provide a general guide to the subject matter. Professional advice should be sought about your specific circumstances.

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What Is an Assignment Sale? Understanding the Ins and Outs of This Real Estate Process

An assignment sale occurs when the original buyer of a property (the assignor) transfers their rights and obligations of the property contract to another buyer (the assignee) before the official closing of the sale.

This process allows the assignee to step into the original purchaser's shoes, taking on the commitments of the property purchase, which could be a pre-construction condo, house, or any other form of real estate.

Now, let's delve deeper into understanding how assignment sales work, their intricacies, and what they mean for buyers and sellers in the real estate market.

Demystifying the Elements of an Assignment Sale

Embarking on a real estate journey often introduces many terms and processes that may seem complex at first glance, with 'assignment sales' leading the pack in complexity and confusion.

Whether you're the original buyer looking to navigate away from closing costs or a savvy purchaser hunting for a valuable investment, understanding the nuts and bolts of assignment sales is an invaluable asset in the dynamic landscape of real estate.

How Assignment Sales Work

Assignment sales introduce a unique dynamic in real estate transactions, particularly in bustling markets like Vancouver Island and the Sunshine Coast .

When you buy a pre-construction unit, the property is yours, albeit not immediately ready for occupation. Life changes or financial circumstances sometimes evolve between the original purchase agreement and the final closing, necessitating a shift in plan.

Here's where assignment sales come into play. The original buyer can sell their interest in the property before the final sale, sidestepping typical hurdles like mortgage payments or land transfer taxes that come with a regular sale. This method provides a strategic avenue for purchasers to hand over their contractual obligations to another party without waiting for the property's completion.

The Assignment Clause: A Vital Cog in the Wheel

The assignment clause in the original contract is central to these types of transactions. This clause allows the transfer of the buyer's rights and responsibilities to another person.

It's crucial to understand that not all pre-construction sales agreements have an assignment clause, and most builders or developers might impose restrictions or require consent before any assignment deal can proceed.

Understanding the Financials: Costs and Fees

Engaging in assignment sales tends to involve several costs that both the buyer and seller must anticipate.

These include the assignment fee charged by the developer, legal fees for contract transfer, and possibly higher legal fees due to the complexity compared to a resale property. There could also be tax implications depending on the nature of the transaction and the parties involved.

Navigating Through the Interim Occupancy Period

A common scenario in assignment sales, especially in pre-construction condos, is dealing with the interim occupancy period.

This period arises when the assignee can take possession (though not ownership) of the unit while the property is not officially registered. During this phase, the assignee pays occupancy fees, akin to rent, which don't go towards mortgage payments.

Understanding this period helps both parties make an informed decision and prepare for the financial responsibilities it entails.

The Pros and Cons of Assignment Sales

Navigating assignment sales requires a balanced understanding of its advantages and drawbacks. While these transactions open avenues for lucrative deals and flexible arrangements, they also carry inherent risks and complexities that can impact buyers and sellers.

This exploration will provide clear insights, aiding your decision-making in the vibrant real estate market.

The Bright Side: Benefits of Assignment Sales

• Less Competition, More Opportunities: One advantage that makes assignment sales attractive, particularly in areas prone to bidding wars like Vancouver Island , is less competition. Fewer buyers are willing or informed about engaging in this kind of sales transaction, reducing the frenzy often seen in hot real estate markets. This situation can present a more favourable buying environment for those ready and willing to proceed with an assignment purchase.
• Potential for a Better Deal: For buyers, assignment sales sometimes offer the opportunity to get into a brand-new unit at a potentially lower cost. Since the assignee is stepping into an existing agreement, they might benefit from the original purchase price, which could be lower than current market rates, especially in fast-growing communities.
• Flexibility for the Original Buyer: For the original buyer, an assignment sale offers a way out, potentially recouping the deposit paid and avoiding financial penalties that might come with breaking a purchase agreement. This strategy can be particularly advantageous if the purchaser's circumstances change and needs to free up cash or avoid taking on a mortgage.

The Flip Side: Challenges and Risks of Assignment Sales

• Complexity and Higher Legal Fees: Assignment sales are not your straightforward real estate transaction. They require additional steps, such as securing the developer's consent, and the legal process is more complex than purchasing resale properties. As a result, both parties might incur higher legal fees to facilitate the transaction.
• Financial Overheads and Closing Costs: For the assignee, the initial cost outlay can be substantial for the assignee. They must reimburse the original buyer's deposit, pay the assignment fee, cover land transfer taxes, and prepare for other closing costs. These expenses require careful consideration and financial planning.
• Uncertainties and Marketing Restrictions: In some cases, developers impose marketing restrictions, making it challenging to advertise the assignment sale. Additionally, the assignee, now the new buyer, takes on certain risks like development charges or changes in market conditions, which could affect the property's value upon final closing.

Making the Move: Deciding If an Assignment Sale Is Right for You

Deciding to engage in an assignment sale is a pivotal moment, requiring a blend of financial foresight and market understanding.

As we delve into this decision-making process, we'll consider critical personal and economic factors that ensure you're making a choice that aligns with your real estate ambitions and lifestyle aspirations.

Conduct Due Diligence: Know What You're Getting Into

Involving real estate agents experienced in assignment sales is a prudent step for guidance through the intricacies of these transactions.

Also, consulting with a real estate lawyer ensures you understand the legalities, your rights, and any potential liabilities you might be assuming.

Consider Your Financial Standing and Long-Term Goals

Reflect on your current financial health and future plans.

For original buyers, if life changes dictate a change in your real estate investments, an assignment sale could be a viable exit. For potential assignees, consider whether this buying pathway aligns with your investment strategy and if you're comfortable with the associated risks.

Stay Informed About Market Conditions

Market dynamics greatly influence real estate valuations. A clear picture of current trends, especially in your buying area (like Fort St John or cities in the Okanagan ), helps make an informed decision.

Understanding these trends could offer insights into whether you're setting yourself up for a profitable investment or a potential financial misstep.

Bringing It All Home with LoyalHomes.ca

Navigating the world of assignment sales can be a complex journey, laden with opportunities and pitfalls. Whether you're considering selling your contractual rights or stepping into an existing purchase agreement, the route is layered with legal, financial, and market considerations.

At Loyal Homes, we understand that your real estate journey is more than just a transaction; it's a pivotal chapter in your life story. We're here to guide you through each step, ensuring you're equipped with the local, accurate, and relevant information to make decisions confidently. Our team is committed to providing a service that stands a notch above the rest, focusing on relationships and community at its core.

Ready to take the next step in your real estate adventure in British Columbia? Whether it's finding the perfect neighbourhood, exploring investment opportunities, or seeking your dream home, we're here to assist.

For a personalized experience tailored to your unique needs, consider our Personalized Home Search . If you're on the selling side and need to understand your property's current market standing, request a Free Home Valuation . Or, for any other inquiries or guidance, feel free to contact us . Your journey to a successful real estate experience in British Columbia starts with LoyalHomes.ca, where your peace of mind is our highest priority.

Frequently Asked Questions

Is it good to buy an assignment sale.

Buying an assignment sale can be advantageous, offering lower purchase prices compared to current market rates for similar properties, especially in hot real estate markets. However, this venture also requires thorough due diligence to ensure that the agreement terms, property details, and financial implications align with your investment goals.

Can You Make Money on an Assignment Sale?

Yes, there is a potential to make money on an assignment sale, particularly if the property's value has increased since the original purchase date. This profit occurs due to appreciation over the period, especially in high-demand areas, but it's crucial to factor in any assignment fees, legal costs, and tax implications to understand the net gainfully.

What Are the Risks of Buying an Assignment Sale?

The risks include a lack of guarantees on the final product as specifications might change, potential delays in construction, and complexities in financing, often requiring a more substantial initial deposit. These elements underscore the importance of legal counsel to navigate contract specifics and to prepare for any contingencies or additional costs.

How Do I Sell My Pre-Construction Assignment?

Selling a pre-construction assignment involves marketing to potential buyers, typically requiring the developer's consent and possibly entailing a fee. Engaging with a real estate professional who understands the local market nuances and legalities of assignment sales is essential to ensure a smooth, compliant transaction.

Do I Pay Tax on Assignment Sale?

Tax implications on assignment sales can be multifaceted, potentially involving income tax on profits and GST/HST on the purchase, depending on factors like the property type and the seller's tax status. It's advisable to consult with a tax professional to accurately determine specific obligations and strategize for tax efficiency based on your circumstances.

What Is the Difference Between a Transfer and an Assignment?

A transfer and an assignment differ significantly; a transfer involves changing property ownership after a project's completion, whereas an assignment sells one's interest in a property before it's finished. Understanding this distinction is crucial as it affects the contractual obligations, rights transferred to the new buyer, and the legal and financial processes involved in the transaction.

• Photo: @ irina88w via Canva.com
• Photo: @ AndreyPopov via Canva.com
• Photo: @ putilich via Canva.com

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Tax implications on assignment of a purchase contract

With the extreme financial uncertainty created by COVID-19, residential homebuilders and buyers are seeing an uptick with incomplete purchase contracts. Buyers are adding clauses that allow them to postpone closings or back out of them entirely. Others are assigning their purchase contracts to new buyers (informally known as "flipping the contract") regularly without careful examination of the tax implications.

To bring some clarity to the tax implications on the assignment of a purchase contract, we will discuss the key income tax, GST/HST, and CRA audit considerations for both contracting parties. Before we get started, let's review the role of the three parties involved in this type of transaction: the assignor, the assignee, and the builder.

Assignment of a purchase contract defined

At its core, an assignment of a purchase contract occurs when an original buyer of a new home, condominium unit, or a single purpose dwelling, allows someone else (i.e., an assignee) to take over the purchase contract. With permission from the builder, the assignee assumes the liability for purchasing that piece of property. Assigning a contract allows the original buyer (i.e., the assignor) to sell their interest in that property before taking possession of it and potentially making a profit.

Income tax implications for the assignor

With an assignment sale, the assignor must report any profit realized from an assignment sale in the tax year in which the right is assigned. The profit will either be treated as fully taxable business income, which is fully taxable, or income from a capital gain, only 50% of which is taxable.

Many taxpayers assume that any profit related to the sale of real estate will be regarded as income from capital gains. However, it is not the nature of the property that determines whether the profit is treated as business income or income from capital gains. Instead, it is the intention of the buyer at the time of the purchase of the property. If the buyer intends to resell it for a profit, the income realized on the sale of the property is business income. Capital gains treatment generally occurs where the acquired property was held for some time and used personally or to generate revenue.

The CRA generally considers that any profit on an assignment sale is business income because the entire transaction typically lasts for a short period and is undertaken with the intention to make a quick profit.

Furthermore, where taxpayers purchase a pre-construction property intending to live in it as a principal residence, the profit will not qualify for the principal residence exemption where there is an assignment sale. This is because the rights to the property would typically have been sold prior to closing. The property was not inhabited as a principal residence and therefore cannot qualify for the principal residence exemption. Thus, any profit would be taxable and treated as business income.

Tax implications for assignors who are non-residents of Canada

When a non-resident of Canada sells Canadian real estate or an option to acquire Canadian real estate, there is a requirement to notify the CRA of such transactions within ten days. Failure to inform the CRA can result in a penalty of up to $2,500 (additional penalties may also be applicable in certain provinces). Furthermore, the purchaser may be liable to withhold 25% of the gross proceeds and remit this to the federal authorities.

GST/HST implications for the assignor

Determining whether the assignor's proceeds are subject to GST/HST is subject to review by the CRA. The issue is whether the assignor meets the definition of a "builder" for GST/HST purposes and whether the assignor intended to purchase the property for business purposes. In many cases, the assignor of the property may be deemed to be a builder under the Excise Tax Act.

If the assignor can demonstrate to the CRA that their intention when they put in the offer to buy the property was to use it as a primary place of residence, then when they assign the contract, they will be exempt from paying GST/HST on the consideration received for the assignment of the contract. If, on the other hand, they entered the contract with the intention of leasing or reselling the property at a profit, then they will be required to collect and remit tax on the total amount charged to the assignee, which includes any mark-up earned through the assignment.

GST/HST implications for the assignee

Under most new construction agreements, the assignor will qualify for the GST/HST New Residential Housing Rebate, which is typically included in the purchase price, as long as the assignor intends to use the home as a place of residence. However, once the purchase contract is assigned, that eligibility is forfeited because the assignor is no longer taking title to the home on closing. It is also worth noting that there can only be one New Residential Housing Rebate application filed per dwelling.

Therefore, it will be incumbent upon the assignee to determine whether the New Residential Housing Rebate opportunity still exists. They will need to meet the stipulated legislated requirements, and they may have to apply directly to the CRA or arrange with the builder to have the rebate amount credited at closing. It is advisable that the assignee provide a declaration to the builder that they meet the requirements for the rebate (i.e., they will use the property as a place of residence) and obtain a commitment in writing from the builder that the New Residential Housing Rebate will be credited to them upon closing.

The builder should ascertain what the buyer's property intentions are before closing because having a New Residential Housing Rebate assigned by a buyer who intends to rent the property will have many potential negative consequences for all parties. The assignee may be eligible to apply for the New Residential Rental Housing Rebate directly with the CRA, where the assignee intends to purchase the property for long-term rental as a place of residence. In addition, the amount due on closing under the original purchase contract may need to increase since the new purchaser cannot assign the New Residential Housing Rebate to the builder.

Recent CRA audit activity

The CRA has increased its compliance efforts in the real estate sector , particularly in areas where speculative activity has increased.

The recent 2019 Federal Budget announced that CRA would be devoting significant resources to pursue and investigate real estate transactions as the government feels that this is a substantial area of non-compliance.

This means that if you are involved in a pre-construction assignment sale, the likelihood that you will be subject to CRA scrutiny will be high, so taxpayers must understand the rules for both income tax and GST/HST relating to assignment sales.

If your return is selected for audit, the CRA will consider the following factors when determining whether you correctly reported a real estate sale:

• The type of property sold
• How long you owned it
• Your history of selling similar properties
• Whether you did any work on the property
• Why you sold the property
• Your intention in buying the property

If you are a professional contractor or renovator, a speculator or middle investor, or an individual renovator, the CRA will be paying close attention to your property sales.

How BDO can help

Are you concerned about how to close your real estate transaction during self-isolation? Do you need help calculating the GST/HST on a newly constructed property? Talk with your BDO advisor today for all your real estate and construction needs.

Jameson Bouffard , Partner, National Real Estate and Construction Leader

Linda McCracken , Senior Manager, Indirect Tax

The information in this publication is current as of June 22, 2020.

This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.

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