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 »

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 »