There are quite a lot of expenses that may be claimed to scale back the capital gain in your vacation home, Louise. Capital expenses are one example. The Canada Revenue Agency (CRA) defines a capital expense as an expense that:
- Provides a long-lasting profit or advantage;
- improves the prevailing property;
- is a separate asset; or
- is critical in relation to the worth of the property.
Capital gain vs. capital expenditure on the prices of owning and selling a vacation home
There is a difference between capital expenditures, which increase your cost basis and reduce your capital gains tax on a property, and ongoing expenditures, that are repairs. Repairs are only tax deductible when a property is used for rental or business purposes and don’t have any impact on capital gains tax.
In your case, Louise, a great example of a capital expenditure could be the expenditure to exchange a shingle roof with a metal roof. Specifically, it provides a long-lasting profit, is an improvement to the prevailing roof, and has significant value.
The windows and flooring also provide a everlasting profit. The furnace is an asset in its own right, so these three expenses would also generally be capital expenditures that may be added to the associated fee of the property for capital gains tax purposes.
What is a capital gain?
A capital gain is the rise in value of an asset or security since purchase and is “realized” when the asset or security is sold. (Similarly, a capital loss is realized while you sell an asset whose value has decreased since purchase.) Capital gains (or losses) can occur in stocks, mutual funds and real estate.
Is replacing a terrace on a vacation home a capital expenditure?
Replacing the old deck and stairs will not be a capital expense, Louise. In fact, the CRA gives a particular example on their website of a wood steps expense being an ongoing expense. If you were replacing wood steps with concrete steps, that may be a capital expense. If you were repairing wood steps, that may not be a capital expense. It could be an ongoing expense or repair versus a renovation or improvement. So whether the deck and stairs cost is a capital or ongoing expense depends upon the precise nature of the work.
Note that the CRA doesn’t provide a particular list of capital expenditures, but reasonably guidelines for determining the variety of expenditure.
Holiday home on the market: What happens when you make a capital gain?
Calculating your cost basis for tax purposes is then your original purchase price, closing costs at acquisition, and capital expenditures through the years. The proceeds minus the selling costs minus your cost basis equals your capital gain. Half of your capital gain is taxable in your tax return within the yr of sale, or two-thirds if the capital gain for a taxpayer exceeds $250,000 in a given yr. A big capital gain in a high-income yr can lead to a tax of 25% or more, depending in your state of residence, your sources of income, and the quantity of your capital gain for the yr.
Read more about holiday home ownership:
