When you purchase an investment property, eventually, if you sell it, you will have to pay Capital Gain's tax. No one will argue the fact that paying this tax is unfair. But, instead of complaining about it, let's look at one primary way to minimize this tax.
How does Capital Gain's tax work? Let's say you invested $10,000 of your money into an investment property. Within a few years of owning that property, you decide you wanted to sell it for $50,000. Capital Gain's tax would be the difference between your original investment of $10,000 and the sale price of $50,000. Half of the resulting $40,000 would get taxed at 50% (20,000) at your current personal tax rate. In other words, only the difference of $20,000 would have to get taxed.
So, if you are retired, your overall tax would be less than if you were earning a full-time income, so this means timing also plays a part in how much tax you pay.
What's exempt from Capital Gain's tax? Your principal residence is not subject to any tax. The Tax law permits that you don't have to pay any tax on the profit you make from selling your primary home. You can do this once a year. So, in the event you spot a bargain on the market, you could improve the property while living in it. This is just one way you can significantly increase your capital, tax-free over many purchases.
Source: DAKU, D.15 secrets the taxman doesn't want you to know Daku, D. (n.d.). 15 secrets the taxman doesn't want you to know. Nassau, Bahamas: Eagle Pub.
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By: Sarah Colucci
Senior Mortgage Agent, Lic. M14000929