What are Capital Gains and How do they Work?

When people buy investment real estate, they look to see how much the property will provide cash flow (money left over after paying expenses) and how much the property will appreciate (grow in value). The goal being to find a property that can generate the greatest yield for the money invested, and will turn the greatest profit at the time they choose to sell.

When an owner decides to sell, and assuming they make a profit on the sale, they are taxed on the gain from the sale- called capital gains tax. While there are a number of different tax details that an accountant can discuss further, capital gains are taxed on the difference between the sale price and the purchase price assuming that value is positive. If an owner loses money on the sale, as in they sell it for less than they bought it, it is called a capital loss, as they lost money on that sale.

This is particularly important for landlords who have owned their property for a number of years, and especially in cases where there has been strong appreciation in the property. Currently, capital gains is not taxable on a personal residence- a place that you own and occupy.

Capital gains are calculated as the difference between the sale price and the purchase price. If a person bought a home for $300,000 and sold it years later for $500,000, they are taxable on the gain of $200,000. However, capital gains only applies to half of that gain- in this case $100,000. They are taxed on that amount at their tax rate. People who make more money are taxed at a higher rate than those who make less.

A common question that we get at Amhurst is, “am I taxed on the amount I make after I pay off my mortgage or only on how much I made after the sale?”. The answer is it does not matter how the property was financed initially, the tax is payable on the full amount of gain.

Looking for a property manager who can advise you on what rental properties to buy or sell? Contact Amhurst today!

3 Ways The New Alberta Budget Impacts Your Rental

Now that the Federal Election has ended, the Provincial Government under Premier Jason Kenney has released their 2019 Budget. With low oil prices, high unemployment, and dissatisfaction with the government in Ottawa, this budget is designed to help put Alberta back on track. Because a budget it holistic, it tackles everything from healthcare to education to social services, but there are a few notes for investors who own rental property in Alberta

Tourism Levy

If you own a property that you rent out for short terms like on Airbnb or Vacation Rental By Owner (VRBO), this affects you. Currently, the government has a 4% tax on all short term accommodations such as hotels and B&B’s, but it has not been applied to short term rental suites. To level the playing field, the province will impose a 4% tax on all short term rentals starting in 2020. This tax will be implemented right through the listing website, but will make short term rentals less appealing as compared to hotels or other accommodation choices.

Electricity Regulated Rate

In 2016, the Provincial Government at the time announced plans to cap the electricity rate at 6.8 cents per kilowatt hour. What that means is if the electrical rate went above that amount, the government would pay the difference. This budget will eliminate that credit.

If you own a rental property where you cover the cost of electricity for your tenants, this may increase the cost of your electricity bills. If you live in a condominium, expect that your condo fees may increase as well as electricity costs are going up. How much is still to be determined, but expect that electricity bills will increase.

Carbon Tax Removal

As of June 4th of this year, Alberta no longer has a carbon tax. That means it costs you a few cents less to fill gas or to heat your home. It also means that many Albertans also won’t receive a rebate cheque for their climate usage.

With Alberta repealing the provincial carbon tax, the Federal Government has legislation in place that mandates either a carbon tax or cap and trade system for pollution in each province. Starting January 1, 2020, a carbon tax will be imposed on Alberta starting at $20 per tonne of carbon dioxide used and rising to $30 per tonne in April next year. The latter is the level that the carbon tax was at before it was repealed. This will then rise by $10 per year until 2022.

Expect that this will raise your gas bill by a little over 6.50 cents per litre and just under 6 cents per cubic metre of natural gas for home heating as of April, with a greater increase in the coming years. For landlords that provide heat for their tenants, and for condos that include heat as part of condo fees, expect bills to increase next year.

In a future piece, we will cover the tax impact of the new provincial budget on your rental property.

Photo courtesy of Jason MacIntosh of The Canadian Press