Taxation of Real Estate Explained
1. Property Tax
Property tax is a local tax levied on real estate based on its assessed value. This tax is used to fund local government services such as schools, police, and fire departments.
Example: A homeowner with a property valued at $300,000 might pay a property tax rate of 1.5%, resulting in an annual tax bill of $4,500.
2. Capital Gains Tax on Real Estate
Capital gains tax is imposed on the profit realized from the sale of real estate. Only 50% of the capital gain is included in taxable income for individuals.
Example: If an individual buys a house for $200,000 and sells it for $300,000, they have a capital gain of $100,000. Only $50,000 (50% of $100,000) would be included in their taxable income.
3. Principal Residence Exemption
The Principal Residence Exemption allows Canadian residents to exclude all or part of the capital gain on the sale of their principal residence from taxation.
Example: If a homeowner sells their principal residence for a $100,000 gain, they can claim the Principal Residence Exemption and avoid paying capital gains tax on that gain.
4. Rental Income Tax
Rental income from real estate is taxable and must be reported on an individual's tax return. Deductions for expenses related to the rental property are allowed to reduce taxable income.
Example: A landlord earns $20,000 in rental income and incurs $5,000 in expenses (such as property management fees and maintenance). The taxable rental income would be $15,000.
5. Capital Cost Allowance (CCA)
CCA is the depreciation deduction allowed for income tax purposes on rental properties. It allows taxpayers to deduct a portion of the cost of the building over time.
Example: A rental property is purchased for $300,000, with $250,000 allocated to the building. The taxpayer can claim CCA on the building, reducing taxable rental income over several years.
6. GST/HST on Real Estate Transactions
Goods and Services Tax (GST) or Harmonized Sales Tax (HST) may apply to the sale of new residential properties or to real estate services.
Example: A developer sells a new condominium for $500,000. The buyer must pay GST/HST on the purchase price, which is typically 5% of the sale price.
7. Tax-Free First-Time Home Buyer's Plan
The First-Time Home Buyer's Plan allows eligible individuals to withdraw up to $35,000 from their Registered Retirement Savings Plan (RRSP) to buy or build a qualifying home without incurring immediate tax.
Example: A first-time homebuyer withdraws $30,000 from their RRSP to use as a down payment on a house. This amount is not subject to tax if it is repaid over a specified period.
8. Real Estate Transfer Taxes
Real estate transfer taxes are levied by provincial or municipal governments when real estate is transferred from one owner to another. The rate and rules vary by jurisdiction.
Example: In Ontario, the Land Transfer Tax is calculated based on the purchase price of the property. For a $500,000 property, the tax would be approximately $6,475.
9. Foreign Ownership Taxes
Some jurisdictions impose additional taxes on foreign owners of real estate to discourage foreign investment and address housing affordability issues.
Example: In British Columbia, the Additional Property Transfer Tax (APTT) of 20% applies to foreign nationals purchasing residential property, in addition to the regular property transfer tax.
10. Real Estate Investment Trusts (REITs)
REITs are investment vehicles that own and manage income-producing real estate. Investors in REITs are taxed on the distributions they receive, which are generally treated as ordinary income.
Example: An investor receives $1,000 in distributions from a REIT in a year. This amount is included in their taxable income and subject to their marginal tax rate.