When I Sell, Do I Pay A Home Equity Tax?

Tuesday Feb 01st, 2022


If you bought your home more than five years ago,  (and, in this market, even 2 years ago), your home has very likely increased in value and accrued a significant amount of equity.  And that's the idea: to have a property that's a great investment over the long term.

A good investment should increase at least proportionally to inflation, however, a great investment outperforms that. Real Estate is so good, it's become the go-to investment to for both equity, at the time of sale, and/or significant rental income. However, many homeowners worry if that increased value is taxable.

Our tax laws are complex and for certain kinds of residential properties, the government does see equity as income.  Here's an easy to understand, deep dive into what our tax laws say we're entitled to.


The Capital Gains Tax

Actually,  this tax, on home equity, already exists as The Capital Gains Tax. Under this tax, any money made by selling a 'capital asset' for more than you paid for it must be taxed along with your regular income at a 50% inclusion rate (only half of the money made is taxed). But, this doesn't apply to your principal residence, ie: the home you own and live in.

Primary Home Exemption

For tax purposes, the government views your principal residence as a residence first and an investment second. This means that to avoid penalizing you for something mostly beyond your control –increase in home equity – we are exempt from the capital gains tax when we sell our primary residence. 

This means that if you own only one home and you live in it as your primary residence, there is no tax on your home's equity. Most people who must pay capital gains tax are those who don't live in the property, or are selling  an investment (income producing) property.

What's The Exception?

You would have to pay capital gains on your primary residence if your home was not a primary residence for a portion of your ownership. Let's say you went traveling for a year and leased out your property.  You have to pay capital gains on that portion of the rental income. As well, if your home was your principal residence for half of the time you owned it and it increased in value by $400,000, you would be required to pay capital gains tax on $100,000:  ($400,000 ÷ 2 = $200,000 and then, (half of that), $100,000 would be taxable as per the 50% inclusion rate).  

Are We Getting A New Home Equity Tax?

Anyone who sells their primary residence must declare it on their tax return, and report that it actually was their primary residence. If someone sells an 'investment' property, that also must be declared - that it was not the Seller's principal residence.  The government isn't planning to implement a federal home equity tax on primary residences. Not only would it be extremely unpopular,  (to say the least), the amount of money the Real Estate industry brings to our economy is so significant, it doesn't make any sense to institute such a tax. Already, we can't write off our mortgage payments, as homeowners in the U.S. can. 

Unfortunately, there are some who suggest that a home equity tax may be smart. The Real Estate market becoming increasingly unaffordable, these days. A Home Equity Tax on our principal residences  wouldn't help a market that is being affected only by a lack of inventory amidst huge demand.  It could actually incite homeowners not to sell, leading to a further lack of supply and driving prices even higher.  A home is a necessity for many people and it's very fair to penalize anyone who is able to own a home, especially when they're already paying income tax and property taxes.

Due to financial hardship, some owners have been forced to sell their homes during the pandemic. A tax on the sale of a primary residence would negatively impact a Seller in such a vulnerable situation.

Home Equity For Retirement

Home equity, for many homeowners, is a major component of their retirement fund. Selling your home allows you to access the accrued equity, likely downsize and use the remaining funds for your retirement years.  With the increased cost of living, more and more people are going to rely on their home equity to help support them. 

Housing Affordability

Critics have also complained that measures like taxing home equity isn't the solution to a deeply ingrained housing affordability issue. Rather than punishing current homeowners or pushing more people away from the long-held  dream of homeownership, they say the government should focus more on creating a supply of affordable housing, and doing so more quickly.

Bottom line

If your home has been your primary residence since you purchased it, you will not have to pay tax on any of the equity when you sell it.  If it was your principal residence, only for a portion of the time or a secondary investment property, you may be required to pay capital gains tax. The wisest thing to do is check with a knowledgeable Accountant and a Lawyer. I am always happy to help refer you to professionals, I completely trust.