How do we determine the purchase price of the house when calculating the capital gains on the rental property?
Purchase price of the house was $500,000
We refinanced it and the revised mortgage on the house was $650,000 based on the value of the house at the time of refinancing.
We we use the $500,000 or $650,000 when calculating the capital gains? Which Option is the correct one to choose from below:
Option A
Purchase Price $500,000
Sell Price $670,000
Capital gain 50% on $170,000
Option B
Refinanced at $650,000
Sell Price $670,000
Capital gain 50% on $20,000
We must first refer to the equation provided by the Canada Revenue Agency (CRA), to correctly calculate Capital Gain/Loss. This equation goes as follows:
Proceeds of Disposition - Adjusted Cost Base + Outlays and Expenses = Capital Gain/Loss
Your Proceeds of Disposition will be the exact amount of money you earned the moment the capital sale was complete. Which in your case is $670,000 (As you stated that the sell price is this amount).
Your Adjusted Cost Base is the amount you paid the moment the purchase was done, which would be $500,000. Therefore,
Purchase Price $500,000
(Sell Price $670,000
+ Outlays and Expenses $0)
Capital Gain of $170,000
50% is taxed for $85,000 Taxable Capital Gain
You haven't indicated any Outlays and Expenses in your post, so make sure to review all expenses that were required to make the sale and purchase so that they can be deducted against your capital gain. As for the example I've provided, i've left it at a theoretical $0 to keep it similar to your original example.
For more information, check out: TurboTax - Capital Gain/Loss
Thank you for choosing TurboTax.