Capital Gains Tax on Real Estate

Owning a rental property is a common real estate investment. Many times, people convert their home into a rental property or a rental property into a primary residence. The change of a property from a primary residence to a rental property, or the other way around, is considered a change in use of property. You are deemed by the government to have sold your property at the fair market value and immediately re-acquire it for the same price. This means that you are required to report the capital gain or loss on the sale that year.

While primary residences are exempt from paying tax on the capital gains relating to the sale of the residence, the years a property was used for rental purposes are not exempt. It is a common mistake for many property owners to not realize the importance of their decision to convert a property’s use. Failure to report a capital gain that arises from the change of use of property is equivalent to failing to report income.

When the CRA realizes that you have failed to report the capital gain on your property, you will be subject to daily compound interest on the unpaid tax from the time the transaction occurred until the present. You may also be responsible for penalties of 10% each for provincial and federal for the unreported amount. The greater value your home has increased from the date of purchase to the date of change in use, the greater the taxes, interest and penalties that will result.

If no enforcement action has currently been taken against you, there is still an opportunity for you to come clean with the government and avoid paying the penalties on the unreported capital gain with the CRA’s Voluntary Disclosure Program. At Mark Feldstein & Associates Chartered Accountants, we help our clients through this process on a regular basis and we can help you too.

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