Capital gains

October 5th, 2009

Capital gains – one of the most frequently discussed areas of income tax.  And maybe one of the most misunderstood areas.  I’m often asked to clarify capital gains, so I’m going to share a few examples.  None of this is by any means all inclusive, since capital gains is a very general term.

Let’s use Ned and Charlene for an example (not a real couple as far as I know!)  Ned and Charlene are a retired couple.  He is 76 and she is 78.

Ned and Charlene have been living just outside the city of Dartmouth for the last 18 years.  They bought a lovely 4 bedroom house after retiring from their teaching careers, and have been living there ever since.  Lately they have been finding it too much work to take care of their large house, and have been talking seriously of selling their place and moving into an apartment somewhere in Halifax.

Ned and Charlene are worried about how much tax they may have to pay when they sell.  They have heard about capital gains tax, and over dinner one day some friends told them they might have to pay as much as 50% in tax.  This has them worried.  They’ve been counting on the sale price of their house to help pay for the Alaska cruise they have always talked of taking.

Let’s see if Ned and Charlene can afford the cruise.

Capital gain is defined, loosely, as the gain realized when as asset is sold.  OK, Ned and Charlene purchased their 4 bedroom house for $165,000.  This included 6 acres of land.  They are hoping to sell for $325,000.  Assuming they get what they are asking, we can calculate their capital gain as follows:  Selling price ($325,000) less the Purchase price ($165,000) equals Capital Gain of $160,000.

So the Capital Gain on the sale of Ned and Charlene’s house will be $160,000.  Note that they can also subtract the selling costs, which may include legal fees, and real estate commissions.

The next step is to determine how much income tax may be owing, to see if they can afford the Alaska cruise, or if they’ll just have to be content to go out on the Harbour Hopper.  Check back in a couple of days for the answer.

Filed under: Personal Tax by David Boese No Comments »