An investor sells a rental property in Alberta for a profit. What federal tax obligation arises from this sale?

Q: What is the correct answer to: An investor sells a rental property in Alberta for a profit. What federal tax obligation arises from this sale?

The correct answer is The investor must report a capital gain, of which a portion is taxable as income, and may also face recapture of previously claimed Capital Cost Allowance (CCA). When selling a rental property at a profit, the investor must report the capital gain (sale price minus adjusted cost base and selling expenses). A portion of the gain is included in taxable income. If the investor previously claimed CCA (depreciation) on the property, any recaptured CCA — the amount by which the sale price exceeds the undepreciated capital cost — is fully taxable as income, not at the capital gains rate.

Q: What background knowledge is needed for this Real Estate Taxation question?

Capital gains on investment property are calculated as the sale price minus the adjusted cost base and selling expenses. A portion of the gain is included in taxable income. CCA recapture occurs when the sale price exceeds the undepreciated capital cost (UCC) of the building. Recaptured CCA is taxed as regular income, not at the capital gains inclusion rate. Both create significant tax obligations that investors must plan for.

Q: What is a good way to remember the answer to this Real Estate Taxation question?

Selling a rental property triggers two potential taxes: capital gains on the profit and CCA recapture on previously claimed depreciation. Gain is partially taxable; recapture is fully taxable as income. When a rental property sale question appears, check for both capital gains and CCA recapture. 'Gain Plus Recapture' reminds you there are two separate tax components.

Q: What exam tip applies to this Real Estate Taxation question?

Watch for the CCA recapture trap. If the question mentions previously claimed depreciation, recapture will likely be part of the correct answer. Recapture is fully taxable, not at the capital gains rate.

Q: How does this Real Estate Taxation concept apply in real world practice?

An investor sells an Edmonton rental property for $500,000 with an adjusted cost base of $350,000 and previously claimed $40,000 in CCA. The capital gain is $150,000, of which a portion is taxable. Additionally, the $40,000 CCA recapture is fully included as taxable income, creating a combined tax hit that surprises many unprepared investors.

Question

Real Estate TaxationABHARD

An investor sells a rental property in Alberta for a profit. What federal tax obligation arises from this sale?

Answer Options

A

No tax is owed because Alberta has no land transfer tax

B

The investor must report a capital gain, of which a portion is taxable as income, and may also face recapture of previously claimed Capital Cost Allowance (CCA)

C

Only GST is payable on the profit

D

The profit is tax-free if the property was held for more than 5 years