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One of the more attractive things about home ownership has been the exemption on the capital gains tax by virtue of home ownership. It is likely an important part of people’s financial future and retirement. The application of the tax to principal residences is changing.

Changes to Principal residence exemption

This is a tax that attaches to the “profit” or increase in value that is gained when a house is sold compared with the original cost of the house minus costs etc. To oversimplify things a bit if a house was bought for $100,000.00 then sold for $150,000.00 later, then the “capital gain” is $50,000.00 (minus input costs).

Normally a portion of this gain is added to the seller’s income and then taxed accordingly. There is, however, an exception to this rule: if the house sold is the person’s principal residence, then there is no capital gains tax applied. This is a good thing for all our clients as I would say most houses sold are in fact principal residences and thus not taxable as a capital gain. This principal residence exception component is evolving a bit though. The federal government is implementing new legislation beginning January 1, 2023.

The new rule effectively says that if you have lived in a house for less than a year, even if it was your principal residence, it still will be subject to capital gains taxes. The federal government passed this legislation with the premise that this new initiative is to combat house “flippers” or people who purchase a home, live in it for a short period of time while renovating it, and then sell the property. The government stated concern is that the practice of flipping is putting unwanted pressure on the housing market.

This has been a debated idea in politics but regardless, beginning in 2023, if you buy and then sell your principal residence within the same 365 days, then any gain realized is 100% taxable as income (on a net of cost basis). There are some exceptions outlined in this new legislation: if the sale was needed for reasons involving death, disability, separation and/or work relocation then it may not apply.

Capital gains taxation in the housing market has long been a point of political discussion in the last years, with rumours that ultimately this tax could be even more universally applied than it is currently. This may be a step in that direction.

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GORD STEEVES
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