Selling recreational property. - Expert Income Tax Help with cross Border tax and immigration and divorce Experts and RRSP and I

XXXXXXX XXXXXX wrote:

 Hi there . My husband and I just sold our recreation property. He didn't know that he would have to pay tax on this. I am wondering if you could give us an estimate on how much tax we would have to pay on this. We did not do any major work so no receipts. We did pay out the bank 25,000 as the main resident and property were combined. Both our names are on the titles. His income is disability 27,000 and mine is 27,406. the property was sold for 125,000 we paid 20,000, and 250 in legal fee. He wants me to mention that he spent 20,000 in improvements but no receipts over the 18 years we had it. Your advice will be greatly appreciated

david ingram replies:

It is difficult to make a guess here because I do not know what country you are in let alone which province or state, everyone of which has a different tax rate.

As a consequence, I am going to make a quick calculation for BC (British Columbia) and CA, California State.

I also do not know whether the disability received by your husband is a taxable disability pension (usually one paid for by the company) or a tax free plan he bought himself or tax free worker's compensation so I am going to consider it taxable.

and i do not know what kind of income yours is and whether there should be some deductions involved.

And, I do not know whether you are over 65 and entitled to  extra Old Age Benefit deductions or if the disabilities are such that you should get the extra  disability deduction. 

I am also not going to worry about the exchange rate differences between 1991 and 2009 (the current tax return).  In 1991 the exchange rate was 1.1458691  and for 2009, the official exchange rate is again 1.14197729 , just about even so I am going to forget about exchange and call it dollar for dollar.

So I am going to assume you had $27,000 each in Canada and were not entitled to any special deduction amounts.  Amazingly, doing that will not affect my answer when it comes to tax on the Capital gain.

I am also assuming you have another house which you live in and own and that is going to be your tax free residence.  If, you rent an apartment in town and spend the summers at your recreational property, it would be tax free.

With regard to the undocumented improvements, I am assuming that they are things like adding a porch, putting in a fence, adding a room, etc which are improvements and not repairs and maintenance. R & M is NOT a cost.

However, if you put together a ;cabin' book showing the property when you first moved in and then another picture when you added the porch, built the deck, added the fence, etc, you have a pictorial record showing that you did the work.

Then you need to add substitute receipts.  They should be whole page like:

On or about July1, 1996, I added the porch.  I bought the materials from XXX for and paid so and so and so $XXXX.XX  for labor.

On or about July 1, 1999,  I added the solarium. I bought the materials from XXX for and paid so and so and so $XXXX.XX  for labor.

On or about Sept 1, 2000, I added the hot tub. I bought the materials from XXX for and paid so and so and so $XXXX.XX  for labor.

On or about, Aug 1, 2007, I built the fence.  I bought the materials from XXX for and paid so and so and so $XXXX.XX  for labor.

Add all of this up and keep it with the pictures in case you are asked for it.    Remember that the value of your own labour is NOT a deductible cost.

So. 

Canada --- 

Paid $25,000 plus undocumented improvements of  $20,000 for a total cost of $45,000

Sold for $125,000 for a capital gain of $80,000.

Only 50% of the $80,000 is taxable so $40,000 is taxable and we divide that in two to get $20,000 each

this is the secret here.  $20,000 more income added to $27,000 will take your tax from about $3,160 each to $8,000 each for about $4,840 of tax each.

In other words, the combined tax went from $6,320 to $15,972.

For the US, in the state of  California, on a joint tax return reporting $54,000, the Fed tax is tax is $4,460 and the California tax is $980 for a  total of  $5,480  which is about $900 less than Canada.

However,

When we add the $80,000 capital gain we get about $11,570 federal and $7,370 California for a total of $18,940.$2,940 MORE than Canada. 

Of course, if the property was in Texas, Washington, Florida or Alaska States, there would not be a State tax and the US tax would be less.

If the property is in Ontario, the tax would be higher.  If it was Alberta, the tax would be lower than the BC tax.

Good luck.