Author Topic: Property Taxes Used to Reduce Capitals Gains on Land Sale??  (Read 385 times)

FIRE_at_45

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Property Taxes Used to Reduce Capitals Gains on Land Sale??
« on: November 13, 2017, 08:11:55 AM »
Taxes & Trying to Avoid Them

This year we sold the property on the Sunshine Coast of British Columbia.  And I realized through the process that real estate is not the be all and end all for making money.  The net return was somewhere between 3.5 - 3.9 % and that's not considering the tax bill that I have to pay on the capital gains. 

The rough math.  We bought the property for $60,000 in 2004 and sold it for $120,000 in 2017.  So the capital gain is $60,000/2 = $30,000 (divorced).  Since capital gains are only taxed at 50% the real gain is $15,000.  I will be taxed on $15,000 at my marginal tax rate.



Knowing that the place would eventually sell I kept some RSP room ($20,500).  That maximized the amount of RSP room I had available. 

The question I have not been able to figure out is whether property taxes and expenses can be written against a capital gain.  They are eligible expenses that you can write off every year if you have a rental property.  But what about land? 



Combined we have paid ~$1,000 per year in taxes (actually more) and we had the land cleared once for sale.  I've taken off these expenses from my capital gains in the magic SimpleTax calculator and it does make a bit of difference. 

I'd love to hear from my tax savvy friends here on the MMM forum if you can write the tax off against the capital gain.  I've searched and I cannot find anything on the topic.
« Last Edit: November 13, 2017, 08:13:45 AM by FIRE_at_45 »
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Mr. Rich Moose

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Re: Property Taxes Used to Reduce Capitals Gains on Land Sale??
« Reply #1 on: November 14, 2017, 08:45:01 AM »
It may be worth running this by an accountant to assess your total situation as there are some factors that need to be considered in this.

If you rented the land out at any point, you may be able to deduct interest costs and property taxes. However, the deductions are most likely limited to the revenue, so you probably won't be able to claim a "loss". They also cannot be added to the ACB of the land.

If you realized no income at all, then you can't deduct interest or taxes. However, you can probably deduct clearing costs and add them to your ACB. That said, you usually can't deduct work you did yourself, so it only applies if you hired someone to do it.

https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4036/rental-income-2016.html#P511_47803

As you can see it's a little complicated...
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FIRE_at_45

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Re: Property Taxes Used to Reduce Capitals Gains on Land Sale??
« Reply #2 on: November 14, 2017, 08:56:05 AM »
Hey RM, thatís unfortunately the conclusion Iíve come to as well.  We have 1 expense of $800 for clearing it for sale that I may be able to claim.  Zero revenue.  Just dirt that sat and slowly appreciated.
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Mr. Rich Moose

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Re: Property Taxes Used to Reduce Capitals Gains on Land Sale??
« Reply #3 on: November 14, 2017, 09:00:21 AM »
On the bright side you can be very Canadian and brag to your buddies about the land investment you made that doubled!
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FIRE_at_45

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Re: Property Taxes Used to Reduce Capitals Gains on Land Sale??
« Reply #4 on: November 14, 2017, 09:04:01 AM »
On the bright side you can be very Canadian and brag to your buddies about the land investment you made that doubled!

Yes, this is true.  Never mind how long it took and how much we would have made on the TSX!
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Matt CPA

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Re: Property Taxes Used to Reduce Capitals Gains on Land Sale??
« Reply #5 on: December 06, 2017, 08:58:45 PM »
I was curious if you have properly evaluated whether this transaction does in fact result in a capital gain. Depending on the circumstances it might not actually be treated as a capital gain, the gain could be on account of income, and therefore fully taxable.
Did this land have any use during the time you held it? What were the intentions when purchasing it?

Taxes & Trying to Avoid Them

The rough math.  We bought the property for $60,000 in 2004 and sold it for $120,000 in 2017.  So the capital gain is $60,000/2 = $30,000 (divorced).  Since capital gains are only taxed at 50% the real gain is $15,000.  I will be taxed on $15,000 at my marginal tax rate.

FIRE_at_45

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Re: Property Taxes Used to Reduce Capitals Gains on Land Sale??
« Reply #6 on: December 06, 2017, 11:01:56 PM »
I was curious if you have properly evaluated whether this transaction does in fact result in a capital gain. Depending on the circumstances it might not actually be treated as a capital gain, the gain could be on account of income, and therefore fully taxable.
Did this land have any use during the time you held it? What were the intentions when purchasing it?

It was purchased as an investment.  We bought it first and then bought our primary residence later that same year.  It's always been held as an investment and we have never done any upgrades to it of any sort. 

Please don't say it's fully taxable.
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Matt CPA

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Re: Property Taxes Used to Reduce Capitals Gains on Land Sale??
« Reply #7 on: December 07, 2017, 11:48:18 AM »
It is a bit of a grey area wither it's a capital gain or not, arguments can be made for either treatment based on the limited facts you have provided.  There may be more facts that help or hurt the argument for capital gain treatment. (for example, if you have purchased/sold/own/ several vacant properties, or you work in the real estate industry then capital gain treatment would be much harder to defend)

I have put some links below which might help you evaluate your situation further. Your motivation will be to report as capital gain, but be aware that CRA may try to disagree with you.

http://www.taxtips.ca/personaltax/realestatesales.htm

https://www.marcil-lavallee.ca/en/resources-tools/monthly-newsletters/list-per-month/135-capital-gain-or-income

https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/it218r/archived-profit-capital-gains-losses-sale-real-estate-including-farmland-inherited-land-conversion-real-estate-capital-property-inventory-vice-versa.html

I was curious if you have properly evaluated whether this transaction does in fact result in a capital gain. Depending on the circumstances it might not actually be treated as a capital gain, the gain could be on account of income, and therefore fully taxable.
Did this land have any use during the time you held it? What were the intentions when purchasing it?

It was purchased as an investment.  We bought it first and then bought our primary residence later that same year.  It's always been held as an investment and we have never done any upgrades to it of any sort. 

Please don't say it's fully taxable.

Free Forever

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Re: Property Taxes Used to Reduce Capitals Gains on Land Sale??
« Reply #8 on: December 09, 2017, 11:42:24 AM »
Per the post by Matt CPA you have entered an area where the CRA may challenge your 'capital gain' claim and you don't want to end up piling a CRA penalty (which also increases your chances of being audited in the future) on top of the taxes.

If I were in your shoes I would pay an accredited tax accountant, with lot's of experience in this area, to figure out my taxes for the year or at least figure out whether this is a capital gain or income. Add in a divorce and your tax situation becomes fairly complex. Did you know that that CRA has a tattle tale system where people like angry ex spouses, p***ed off ex tenants etc can report alleged tax evasion issues on other people. Be careful.

I think people considering investing in real property , particularly in Canada, need to put more consideration into these issues before they pull the trigger:

- Real estate investing (outside of REIT's) is generally an active investment that requires some of the owners time and effort.
- There are way more specific risks in active real estate investing than there are in passive.
- The CRA may see your investment as a business
- There may be significant professional fee's (legal, tax, consulting), which I consider normal transactional costs for this type of investment, that will need to be paid in infrequent lump sums throughout the term of the investment. These often aren't considered in the pro-forma stage. Even if you do the work yourself that's an opportunity cost which is often bigger than outsourcing to a pro.
- On a risk adjusted basis it's almost always better to engage the professionals (lawyers, accountants etc.) before pulling the trigger so one can structure the investment optimally and avoid certain risks.

TrMama

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Re: Property Taxes Used to Reduce Capitals Gains on Land Sale??
« Reply #9 on: December 14, 2017, 10:35:24 AM »
I can't see how this particular sale could be treated as anything other than a capital gain. It never generated any income, it was owned by two individuals (not a corporation) and this is the only property you've sold in years.

We sold a more complicated income property in the lower mainland last year and even it was treated as a regular cap gain. We used a CPA to confirm our tax amounts and it was well worth the expense. I'd recommend the same for you. The difference in tax here (claiming expenses vs not) is less than what the CPA will charge you. I think you may also be able to claim an RE transaction fees (commission, lawyer, etc), but confirm that with the CPA before filing.

FIRE_at_45

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Re: Property Taxes Used to Reduce Capitals Gains on Land Sale??
« Reply #10 on: December 14, 2017, 03:07:25 PM »
^thanks all, I think what Iíll do is gather all the documents and go to a CPA. 
I have a journal: A Journey of Self Discovery in the Pursuit of Happiness

On dating endlessly: ďEverything will be alright in the end! If itís not alright, itís not the end!Ē

Canadian and not satisfied with your current bank?  Switch to Tangerine using this key 47894562S1 and we both win.