The Principle Residence Exemption
If you buy or inherit a house, you own the house. Now, houses are many things. They are a roof over your head, a place to relax with family and friends, but they are also an investment. Although some people may not look at home ownership that way, unless you’re in the business of buying revenue properties, when you buy a house you’re making an investment like it or not. To be precise in accounting terms, you’re making a capital investment, which means investing in something that will bring you benefit over time.
But the terminology really isn’t important. What’s important is that if and when you decide to sell your house one day, and you fixed it up and it’s worth a lot and you negotiated a nice profit out of a buyer, you got a surprise waiting for you around the corner.
Surprise! You just got yourself a capital gain!
Gain? Gains are good, right?
Sure, but they also mean that you are paying taxes of 50% of your profit.
So we’ve reached an impasse. A dead end. Fifty percent of your profit on selling your house is gone.
Wait. There’s another surprise around the corner. It’s a law in the Canadian tax system that allows people to not pay capital gains taxes when they sell their house. All you have to do is fill out a paper. This is the principal residence exemption.
I’ll give you a few minutes to celebrate before I add in a few things.
If you own two properties where you live, for example a house and a cottage, you can only use the exemption for one of them per year. This part is a bit more complicated with some number crunching so you may have to pay an accountant.
You have to actually have lived in the house. Rentals aren’t counted.
Husband and wife have to choose the same house if there are two.
But that shouldn’t spoil it for you. The principal residence exemption is an important part of every tax planning situation or really any situation where you own a home.
Don’t forget about it when you are thinking about selling your house.