Gains on the sale of a principal residence are not necessarily exempt from tax. The tax authorities can tax on capital gains in certain circumstances, such as when owner leaves their principal residence to move into a nursing home.
For seniors considering a move to a nursing home, they or their children must decide what to do with their principal residence and should understand the related tax implications.
To take advantage of the principal residence exemption and not have to pay tax on the sale of their principal residence, the property must meet all of the following four conditions:
- It is a housing unit, a leasehold interest in a housing unit, or a share of the capital stock of a co-operative housing corporation you acquire only to get the right to inhabit a housing unit owned by that corporation.
- You own the property alone or jointly with another person.
- You, your current or former spouse or common-law partner, or any of your children lived in it at some time during the year.
- You designate the property as your principal residence.
If a senior who has no spouse or child leaves in her/his principal residence when moving into a nursing home, she/he loses the right to claim the principal residence exemption for the years in which she/he must live in a nursing home.
To avoid such a surprise, here are some considerations as seniors explore the possibility of transitioning to a nursing home.
Sell the Home
The default option is to sell the senior’s principal residence. In this case, they can use the principal residence exemption to eliminate any capital gains tax on the property. The proceeds could be used to fund their nursing home and provide an early inheritance for their beneficiaries.
Have an Adult Child Live in the Home
If a senior does not wish to sell the property, they may wish to take advantage of the ordinarily inhabited rule by having an adult child occupy the home during this period.
Rent out the Home and File a Subsection 45(2) Election
When a taxpayer converts a principal residence to a rental property, Income Tax Act deems the taxpayer to dispose of and to immediately reacquire the property at fair market value.
Generally, income-producing properties cannot be designated as a taxpayer’s principal residence unless the taxpayer qualifies for and files a subsection 45(2) election. The subsection 45(2) election deems no change in use to have occurred and allows a taxpayer to designate the home as their principal residence for up to four tax years during the time it is used for income-producing purposes–thus deferring the deemed disposition until the property is sold.