Capital Gains – Part 2

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 »

Leave a Reply

Your email address will not be published. Required fields are marked *