How you can avoid paying tax on capital gains from the sale of your family owned farm property?
Nobody likes paying taxes and in some cases, you don’t have to. This could be one of those situations. Do you own a farm and live in a residence on the property? If so, it could well be possible for you to pay NO TAXES on the sale of said property.
This hugely rewarding tax break comes in the form of two “exemptions.”The Lifetime Capital Gains Exemption (LCGE) for Qualified Farm Property and the Principal Residence Exemption (PRE) can lead to NO TAXES needing to be paid on any capital gains generated through the sale.
The criteria surrounding qualified farm property can be complex, so reach out to the appropriate professional advisor to help you assess your eligibility for the LCGE. The maximum LCGE for individuals who realize capital gains on the disposition of their Qualified Farm Property is $1,000,000 for the 2016 tax year. Since only half of the capital gain on the disposition of property is taxable, the resulting capital gains deduction limit is $500,000. That represents a considerable tax break should your farm qualify.
To qualify for the PRE, the property must be a “capital property” of the taxpayer. “Principal residence” is defined as a property which the taxpayer (or the spouse, common-law partner or child of the taxpayer) has “ordinarily inhabited.”
Example:a husband and wife own two properties: 1) a house on a farm used for business purposes, which they have lived in for all 10 years of ownership, and 2) a condo they have rented out for the 3 years they have owned it. The couple decide to sell both properties this year, and stand to make a profit on both. Essentially because the farm property is considered their “ordinarily inhabited” residence, they will not pay any tax on the profit made on that property, however they will have to pay tax on the rental property.
Starting January 1, 2016 you must report the sale of your Principal Residence on your tax return to be able to take advantage of the principal residence tax exemption. This is new for this year, and an important consideration when filing your taxes in the year of sale. This literally could save you thousands of dollars.
Once again, tax rules around capital gains can be complex. Please contact us here at Insight Online Accountants if you need professional advice on the LCGE, PRE, or any other tax saving strategies.
DISCLAIMER: THIS ARTICLE deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein. Although every reasonable effort has been made to ensure the accuracy of the information contained in this letter, no individual or organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.
