In this episode of Real Estate 101, Realtor Joe Terceira is joined by tax lawyer Sabina Mexis of Devry Smith Frank to discuss investment property and how it is taxed compared to your principal residence.
What is Considered an Investment Property?
For tax purposes, the government considers an investment property to be a property which you do not “ordinarily inhabit”. This means that a property that is rented out to tenants, or a commercial property is considered an investment property.
On the other hand, the property in which you do reside is generally considered to be your principal residence.
As such, the investment property is taxed differently from your principal residence. While you do not pay any tax on profits when you sell a principal residence and can file a principal residence exemption in your tax return for the amount of the capital gain on the sale of this property, with an investment property the situation is a bit different,
Namely, there are two possible tax consequences when it comes to investment property, which can depend on the number of investment properties you own. For example, if you have only one investment property and you decide to sell it, the gain arising on the sale will be treated as a capital gain and only 50% of the gain will be taxable.
However, if you have multiple investment properties, it is possible that the proceeds from the sale would be considered to arise from the sale of inventory and not capital property and as such, the proceeds would be taxed as a regular business income.
Can a Principal Residence Exemption be Used for an Investment Property?
The principal residence exemption generally only allows one property to be designated as a principal residence per household. Generally speaking, the principal residence exemption cannot be used to shelter the gain arising from the disposition of an investment property.
It is possible, however, to use the principal residence exemption to shelter the gain arising on the sale of a cottage for example. It can also be used for real estate located outside of Canada, such as a Florida condo. There are, of course, certain intricacies when it comes to claiming the exemption, and the availability of the exemption depends mainly on the use of the property being claimed.
What are the Advantages and Disadvantages of Owning Investment Property Personally?
There are certain advantages and disadvantages to owning an investment property personally.
The biggest advantages to owing property in your own name is that it is generally quicker and relatively easier to purchase a property in one’s own name. Usually, an individual purchaser can put down a smaller deposit on the real estate being purchased and any financing can also generally be obtained at a lower interest rate when the borrower is an individual.
The biggest disadvantage to owning investment property personally is that there is a potential exposure of all your personally held assets in the event of a lawsuit or other similar liability In other words, if you are sued for damages from an incident arising on an investment property (say a slip and fall or other incident on residential rental property), then all of your personally held assets become available to satisfy a potential judgment against you.
Similarly, all of your property is available to satisfy the claims of potential creditors and can be seized to satisfy any liability, whether tax, personal injury, lawsuit, etc…
Watch this episode to learn more about investment property.
For more information on tax law contact:
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Joe Terceira / Sales Representative
THE JOE TERCEIRA TEAM
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