Selling a vacation home starts with understanding the differences between a second and a primary home. Not only will the rules change for listing the home, but sellers have to be ready for new tax laws that apply only to vacation homes. While talking to a real estate agent with experience in second home sales is the best way to get all your questions answered, understanding some basic distinctions is a good way to get started when selling their home.
Deciding When to Sell a Home
All home selling is cyclical—there are certain months when people want to buy and others that are not as popular. However, second homes can follow this rule more so than standard home sales. For example, homeowners with a property near a ski chalet may only see winter buyers, because investors want to wait and see just how popular the resort will be.
And even if there's more competition during the popular months, sellers can still use the sheer number of buyers to their advantage. If they stage the home correctly, they may even inspire a bidding war that pushes the home sale price in the right direction.
What to Know About Taxes When Selling a Vacation Home
Capital gains refer to how much appreciation occurs from the time an asset is bought until the time it's sold. They're usually associated with the stock market, but they apply to any major asset. So if the second home was purchased for a net $85,000 and then sold for a net $200,000, the capital gains would be $115,000. In the case of a normal home sale, capital gains are usually deducted. However, with a second home, half the appreciation is added on to the homeowner's yearly income and then taxed according to the resulting bracket.
So if the owner already makes $100,000 a year in the example above, then their income becomes $157,500 (or half the $115,000 appreciation added to their yearly income). Exact percentages for each homeowner's taxes will vary by province, but all sellers need to account for capital gains if their home has gone up in value.
Facts on Capital Gains
A capital gain is the difference between what an asset was purchased for and what it was sold for, and capital gains on the sale of a second home do not get a break like primary homes do. Those in the top income brackets will pay 20% of the full appreciation of their home. The most common income rate is 15%, which is still a fairly large chunk of the appreciation. The good news is that homeowners are allowed to deduct major renovation costs to the home as well as all closing costs (including real estate agent fees.)
Facts on Mortgage Interest
What are the tax benefits of owning a home? Homeowners were allowed to deduct mortgage interest on their taxes if they had accumulated debt that was under $1 million, but this was recently changed. Now, the limits are set at $750,000, which is an easy enough limit to meet when owners have more than one property under their belt. While technically a rule for those who still own their vacation home, it's worth noting when filing at the end of the year.
Facts on Depreciation
It can be tempting to claim high values of depreciation for those who claim rental income. The more depreciation, the less rental income a person has to declare. However, there's a risk in this strategy if the property value has steadily climbed. Those who claim a high level of depreciation will start with that number when calculating their capital gains. So if the property was originally purchased at $500,000, depreciated at $100,000 and then sold at $1 million, the capital gains will be taxed at $600,000 instead of $500,000.
Facts on Deductions
If the vacation home has gone up in value, an Altadore homeowner would be smart to concentrate on their deductions rather than their depreciation. What can be deducted can be tricky though, so it helps to talk to a real estate agent. For example, a homeowner can deduct major home renovations but 'major' is a vague enough term that homeowners should consult with someone who understands the specifics. Homeowners can also usually deduct the closing costs from the original purchase of the property, in addition to the real estate-related costs of the home sale.
Facts on Changing Residences
Investors will sometimes make their vacation home their primary residence if their vacation home has risen in value while their primary residence has declined. In this case, homeowners can sell the primary and deduct their capital losses from their capital gains to avoid taxes. They can also then sell their vacation home turned primary home after two years so they can deduct $250,000 per owner from their home sale.
If you're wondering how to sell your one-of-a-kind home in Calgary, know that understanding home taxes is a matter of diving into the details of depreciations and deductions. The more effort a person puts into their home sale costs, the more likely it is they'll be able to reap the benefits of their vacation home appreciation.
Abating Your Capital Gains
There are a few ways to lighten the burden of capital gains:
- Closing costs: Sellers are allowed to deduct the closing costs from their appreciation. From real estate agent fees to inspector charges to attorney costs, these fees can be lumped together.
- Advertising costs: Any fees the seller spends to market the home (e.g., professional photos, videos, etc.) can also be deducted from the sale price of the home.
- Home renovations: Major home renovations can be added to the purchase price of the home, thus lessening the total appreciation. However, not all home repairs count toward this benefit. Sellers may need to check with city officials to find out if their work qualifies.
Sellers are also allowed to donate their capital gains for a substantial tax credit, but it usually takes a financial planner to advise a homeowner if this option is worth it. Sellers who need an extension to pay their capital gains can file through the Canadian Revenue Agency. This is highly recommended if the escrow period runs longer than expected.
How to Market your Vacation Home to Buyers
Showcase your vacation home with the best possible staging and photos so that potential buyers can truly see the value of the home. If you have an amazing view or location, be sure to include photos from your balcony or deck as well. Highlight your home's best features in a bulleted list and incorporate the benefits of the area your home is located in as well. If your home is near a well known attraction or destination, make sure you include this proximity in your description and marketing. You should also let prospective buyers know about rental rates, either your historic vacation rental rates or local Air BnB rates for your type of home. This can help buyers get the full financial picture of your home. Great photos, the right context and information and the financial details needed to make a buying decision will help you effectively market your vacation home to a new buyer.
Taking the time to run the calculations can help sellers prepare for what their yearly budget will look like. Talking to the right High River real estate expert can also be a good way to get questions answered so sellers can make the best decisions.
Justin Havre is the top producing REALTOR® with RE/MAX First, Canada's very first RE/MAX brokerage. Calgary real estate is his passion; Justin specializes in Southwest & Northwest Calgary homes for sale. He can be reached at 403.217.0003 or contacted through this site.