October 9th, 2009
Ned and Charlene are worried. ¬†They want to go on their Alaska cruise, but are afraid that too much of the sale of their house will go to the tax man. ¬†In this article we’ll continue from where we left off, to see just how much they could owe in capital gain taxes.
First, it’s important for Ned and Charlene to understand a few things about capital gains. ¬†We’ve already discussed what a capital gain is (selling price less the purchase price.) ¬†But what they didn’t know is that one half of a capital gain is exempt from tax. ¬†That’s right; it’s just simply not taxed. ¬†Pretty good deal actually.
Better yet, the sale of your principle residence is almost always tax free. ¬†You can sell your main residence without paying any tax at all. ¬†Up to one half of a hectare (just over one acre) of the land surrounding the house can also be sold tax free. ¬†Any excess land “not necessary for use and enjoyment of the house” is taxable.
In Ned and Charlene’s case, they have 6 acres of land. ¬†They will need to pay tax on the capital gain of roughly 5 acres. ¬†They are very pleased to hear that they won’t need to pay any tax on the sale of the house, however! ¬†After consulting their original purchase documents, they calculate that five acres of land cost them $4,500 back when they bought the place 18 years ago. ¬†Their real estate agent tells them that the selling price of this land today will be $11,500.
So if we take the sale price of $11,500, subtract the purchase price of $4,500, that gives us a capital gain of $7,000, on the land. ¬†One half of this is not taxed, leaving them with a total taxable capital gain of only $3,500! ¬†Assuming their income tax rate is 40%, their total income tax bill on the sale of their property will be only $1,400.
Ned and Charlene are very pleased. ¬†Not only have they already booked their Alaska cruise, they are taking their 11 grandchildren out on the Harbour Hopper as well!
Please be advised: ¬†While I really hope this article helped capital gains make sense, it is based on simplified information, and meant for illustration purposes only. ¬†It is not intended to be used as an actual reference in calculating capital gains.Filed under: Personal Tax by David Boese No Comments »