John and Mary are married and own three properties: their principal residence worth $600,000, a cottage worth $300,000, and a rental property worth $400,000. They sell the cottage for $450,000 after owning it for 6 years. If they designate it as their principal residence for 4 of those 6 years, what portion of the capital gain is exempt from tax?
Correct Answer
C) $125,000
The capital gain is $150,000 ($450,000 - $300,000). Using the principal residence exemption formula: (4 years designated + 1) ÷ 6 years owned × $150,000 = 5/6 × $150,000 = $125,000 exempt. The remaining $25,000 gain is subject to capital gains tax.
Why This Is the Correct Answer
The capital gain is $150,000 ($450,000 - $300,000). Using the principal residence exemption formula: (4 years designated + 1) ÷ 6 years owned × $150,000 = 5/6 × $150,000 = $125,000 exempt. The remaining $25,000 gain is subject to capital gains tax.
Deep Dive: Understanding the Answer
The capital gain is $150,000 ($450,000 - $300,000). Using the principal residence exemption formula: (4 years designated + 1) ÷ 6 years owned × $150,000 = 5/6 × $150,000 = $125,000 exempt. The remaining $25,000 gain is subject to capital gains tax.
This question tests your understanding of Real Estate Taxation concepts that are commonly assessed on Canadian real estate licensing exams. The correct answer, “$125,000”, reflects a fundamental principle that real estate professionals in Canada must understand.
Specifically, this falls under the sub-topic of Capital Gains, which is an important area within Real Estate Taxation that appears regularly on provincial licensing exams across Canada.
About Real Estate Taxation
Property tax, land transfer tax, GST/HST on real estate, capital gains, and tax planning.
Real Estate Taxation is one of the core areas covered on Canadian real estate licensing exams, including RECO (Ontario), BCFSA (British Columbia), and RECA (Alberta). Understanding these concepts is essential for anyone pursuing a career in Canadian real estate.
Study Tips for Real Estate Taxation
- •Know when GST/HST applies to real estate transactions and when it does not.
- •Understand land transfer tax calculations for your province.
- •Review the principal residence exemption for capital gains.
- •Study the tax implications of non-resident buyers (NRST).
More Real Estate Taxation Questions
What is the maximum GST/HST New Housing Rebate available for qualifying new homes in Canada?
A first-time homebuyer in Ontario purchases a new home for $450,000. What is the maximum GST/HST new housing rebate they could receive?
What is the primary purpose of municipal property taxes in Canada?
In Ontario, who is responsible for paying the land transfer tax when a property is purchased?
What GST/HST rate applies to the purchase of a newly constructed home in Ontario?
- → Under the Income Tax Act, what is the principal residence exemption?
- → Sarah purchased a rental property in British Columbia for $600,000 and sold it three years later for $750,000. What portion of her capital gain is taxable?
- → What happens to property taxes when a property is sold mid-year in most Canadian provinces?
- → In Alberta, what is the land transfer tax rate for residential properties?
- → A real estate investor owns a property that has appreciated significantly but wants to defer capital gains tax. Which strategy would be most appropriate under Canadian tax law?
- → A Toronto resident owns two properties: their principal residence worth $800,000 (purchased for $400,000) and a cottage worth $500,000 (purchased for $300,000). If they sell both properties in the same year, what is their total taxable capital gain?
- → In British Columbia, what is the general Property Transfer Tax rate for residential property purchases up to $200,000?
- → What is the current HST rate that applies to the purchase of a new home in Ontario?
- → Which of the following best describes when land transfer tax is typically paid?
- → What is the primary purpose of municipal property tax in Canada?
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