Capital Gains Tax on the Sale of a Rental Property

When you sell a property that has been rented out, there may be a tax on the appreciation in value compared to your original purchase price. The basic caculation considers the sale proceeds less sale commission and legal fees, called the "net sales price" less the original purchase price plus property transfer taxes and legal fees, called the "cost basis" less capital expenditures on improvements made to the property which were not claimed on your tax returns for any of the years you owned the property

The difference between the net sales price and the cost basis and the capital improvements determines the total gain realized on the sale of the property. Unless you are in the business of buying and selling properties, the CRA rules are that you only have to report one-half of the gain in your tax return in the year in which you sold it.

There are other considerations:

• Was the property owned by one person or jointly with a spouse or other individuals? The taxable gain should be reported on each owner's tax return based on their percentage interest in the property.
• Did you claim depreciation on the property in any of your tax returns? This will reduce the cost basis.
• Did you live in the property as your principal residence? If you did, then the calculation of the gain has to take into consideration the number of years that you resided in it versus the number of years it was rented out
• If you rented out only a part of the property, then the capital gain would have to be prorated by that percentage
• If you rented another place while you rented out your real property, then there is the potential to send a letter to the CRA designating the rental property as your principal residence for four years. If the rental property is sold within those four years, then it will be exempt from taxes because of the Principal Residence Exemption. This letter must be sent to the CRA at the start of the rental period

In order to determine how much of the appreciation is taxable, we need the following documents:

• A copy of the original purchase agreement along with the statement of adjustments
• A copy of the sale agreement along with the statement of adjustments
• A total for capital improvement to this property, those not having been claimed on any previous tax returns as "repairs"
• The cumulative total of depreciation/capital cost allowance claimed on the property in your personal tax returns for the years that you owned the property