Everything You Need to Know about Selling Your Vacation Property
Looking to Sell Your Kelowna Vacation Property?
Significant tax implications exist when it comes to the sale of your Kelowna vacation home. In Canada, the most significant tax to be privy too is capital gains. Having an understanding of the amount of the tax, including ways to reduce it, will help you to make informed decisions when you’re looking to sell.
What are Capital Gains?
In the most simplistic sense, you’re deemed to have a capital gain when you sell a property (other than your primary residence) for more than you originally paid.
Imagine you purchased your vacation home in 2010 for $400,000, and in 2019, the property’s market value (when you’re ready to sell) has risen to $850,000.
The appreciation, or difference between the original price paid, and the sale price, is considered to be a capital gain. In this instance $450,000 (or $850,000 less $400,000) is the capital gain.
In Canada, half (or 50%) of the capital gain is taxable.
If you look to sell a vacation property this year, 50% of the appreciated value is added to your personal income and is taxed accordingly. Of course, tax rates vary from person to person (based on income levels) and from province to province.
For example, if you earned $150,000 and then you sell your vacation property, which appreciated by $450,000, half the gain (or $225,000) would be added to your income, resulting in a total income earned of $375,000.
What’s The Difference Between a Primary Residence and a Vacation Home
Thankfully, capital gains tax does not apply to primary residences. So, if you look to sell your primary residence, which often appreciates significantly over time, you will not face paying capital gains tax.
Ways to Reduce Capital Gains
Capital gains are pretty gloomy for sure, but it’s nice to note there are expenses you can deduct to help reduce the amount you pay.
- Capital losses can help offset capital gains.
- Major renovations on the property are potential deductions - though, you should speak to a well-informed Realtor, and have a chat with your accountant.
- Closing costs for the original purchase and the sale can be deducted, which might include real estate commission, legal fees, inspectors, etc.
- Advertising Costs can be deducted - any money spent to market the property, which might include staging, online marketing, print ads, signage, etc.
- Lost rent from vacancies.
- Donating capital gains to a charity may result in a tax credit.
Appreciation seems simple enough if you originally purchased your property as a vacation home, then also look to sell it as a vacation home.
What becomes challenging, though, is determining value when a property’s use has changed over time.
Imagine, for example, you purchased a condo in Kelowna, intending to use it as a vacation home. But, after five years, you choose to move into the property full-time - now, it’s your primary residence. After another three years, you look to sell it.
Likely still responsible for some level of capital gains, it becomes increasingly challenging to determine timelines and values when it comes to taxation.
If the use of your vacation home has changed over time - perhaps originally intended as a principal residence, and is now considered your vacation home, it’s best you speak to your accountant prior to making any changes so that you can adequately tax plan.
The Best Time To Sell a Vacation Property
Not only is it helpful to determine the local market conditions, and your likely competition (other similar properties), it’s best to sell the property in the best season too.
Looking to sell a ski chalet - buyers are likely dreaming of powdery slopes and a warm glowing fire during winter months.
Conversely, it could be more advantageous to sell a lakeside property during the spring and summer months when the property shows the best.
Keep in mind, some buyers might want to use the condo for themselves, so having pre-booked rentals could hurt your sale.
Tips on Selling a Vacation Home
Like any property, taking the time to prepare a property for sale is always worth the effort. Considering most vacation properties are furnished, it could be a good idea to take inventory of the condition of the furniture. If the furniture is a little worn or dated, consider replacing it so your property stands out. If the property is vacant, it’s worth exploring staging options, as many buyers struggle to envision empty spaces. Conduct minor repairs, leaving a buyer, little reason to discount their offering price.
If you need help determining market value, or you’d like to explore selling your vacation property, contact me today.