Selling an Income Property? Know the Tax Implications

For many Alberta business owners and investors, a rental property can be a valuable long-term investment. But when the time is right for selling an income property, the tax consequences can be more complicated than expected. Here is an article discussing this.

Before you put that property on the market, it is worth understanding what the sale could mean for your tax return.

Here’s a video taking a look at selling your income property.

Capital Gains

If you sell an income property for more than its adjusted cost base, you will generally have a capital gain. Your adjusted cost base is usually the original purchase price, plus certain costs and improvements, less any applicable adjustments.

Selling costs, such as real estate commissions and legal fees, can generally be deducted when calculating the gain.

The taxable portion of the capital gain is included in your income for the year of the sale. Since the federal capital-gains rules have been changing, it is important to confirm the rules that apply at the time you sell.

Watch Out for CCA Recapture

If you claimed Capital Cost Allowance (CCA) on the building over the years, you may also have to deal with CCA recapture when you sell.

CCA can reduce your taxable rental income while you own the property. However, if you sell for more than the remaining undepreciated capital cost of the building, some or all of the CCA you previously claimed may have to be added back to your income.

In other words, the tax savings you received from claiming CCA can come with a tax cost when the property is sold.

Don't Forget the Other Details

The tax treatment can vary depending on the type of property, how it was used and how long you owned it. There may also be GST considerations, particularly for commercial or other non-residential properties.

And while paying off the mortgage is usually part of the sale process, the amount of your mortgage does not determine your capital gain.

Plan Before You Sell

Selling an income property can result in a sizeable tax bill, especially if the property has appreciated significantly or you have claimed CCA over many years.

Before you sign the deal, talk to your accountant. We can help you estimate the potential tax consequences of the sale, identify the information you will need and plan for the tax liability before it becomes a surprise.

A little planning can go a long way toward making the sale—and the tax return that follows it—much easier to manage.

Contact Shaw & Associates Chartered Accountants for accounting help you can count on. One complimentary meeting with us will put you and your business on a more profitable and positive path.