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Selling a home

A planned sale happens in a month the plan names. The home is sold at its projected market value that month, and what is left after costs and the mortgage becomes cash in the plan.

The rules

  • Selling costs. The default is 5.8% of the price: a 5% commission, 13% HST on the commission, and legal fees. It is an Ontario figure for a typical Toronto sale; commissions are negotiable.
  • Mortgage payout. The balance still owed is repaid from the proceeds. A lender may also charge a prepayment penalty, usually three months' interest or an interest-rate differential, depending on the product.
  • Capital gain. Proceeds, less selling costs and any penalty, minus the home's cost. The cost is the purchase price plus land transfer tax and other costs of buying, plus capital improvements; maintenance does not count. Half of a taxable gain is income, as in any capital gain.
  • Principal residence exemption. The gain is reduced by gain × (1 + years designated) ÷ years owned. When every year owned is designated, the whole gain is exempt. A family may designate only one home for any year. A loss on a home that was only lived in is treated as nil, not as a capital loss.
  • Rented part. If part of the home was rented, the exemption on that part is at risk. CRA keeps the whole home exempt when the rental is ancillary, there is no structural change, and no capital cost allowance was claimed. A self-contained suite is the CRA's own example of a structural change. See the exemption and a suite.

What the engine does

  • Sells at the market value in the sale month, using the home's appreciation rate.
  • Takes selling costs at the rate entered (5.8% by default).
  • Pays off the mortgage balance from the proceeds. If the price does not cover payout and costs, the shortfall is a bill the month pays from cash and savings, and if it cannot be paid the projection stops.
  • Repays any home equity line against the home at closing; see when the plan runs short of cash.
  • Designates every year as a principal residence. For a home with a rented suite the planner treats the rental as ancillary, so the gain on the whole home stays exempt and the plan says so; the engine can instead tax the rented share at a change of use, but the planner does not ask for that.
  • Taxes any gain left over at the 50% inclusion rate, in the year of the sale.

What it deliberately does not

  • Rent after a sale. Rent stops before the first purchase and the plan does not start charging it again after a sale. A household that sells and then rents is not yet modelled as paying rent; the rent entry explains the current rule.
  • A prepayment penalty. The engine accepts one as an input, but the planner does not ask for it, so none is charged.
  • Capital cost allowance, and the recapture it causes, on a rented portion.
  • Listing discounts, negotiation, time on the market and a gap between sale and purchase.
  • Non-resident sellers.

Connected to

  • Capital gains and the adjusted cost base · Selling an investment for more than its adjusted cost base is a capital gain, and half of it is added to taxable income in the year of the sale. Growth that has not been sold is not taxed.
  • Capital losses and the superficial-loss rule · A loss on a non-registered investment first cancels capital gains in the same year; any excess carries back three years or forward without limit. A loss is denied if the same investment is bought back within 30 days.
  • Home prices over time · A home's value is projected by growing it at one assumed rate, 3.5% a year by default, which is PWL Capital's 1% real return on a house plus 2.5% inflation. It is an editable assumption, not a forecast, and the Simulation view shows how widely a real home's value varies around it.
  • Land transfer tax · Ontario charges a tax on the price of a home, rising from 0.5% to 2.5% in brackets, and Toronto adds a second one of its own. A first-time buyer gets a refund of up to $4,000 from Ontario and $4,475 from Toronto.
  • Rent, and when it stops · Rent is its own line in the plan rather than part of living expenses, and it stops the month your first home closes — because a household that has bought is not paying both. Give it an end date if you would keep renting past that.
  • Renting out part of your home · Suite income is taxable and its expenses are deductible on the rented portion, but renting can also limit the principal-residence exemption on the eventual sale. The planner assumes the rental use stays ancillary, so the whole gain on a sale stays exempt, and says it assumed so.
  • When the plan runs short of cash · When a month needs more money than the plan has, it draws savings in a set order, then borrows on a home equity line at 5.13% and an unsecured line at 8.38%, as far as a lender would lend. When no lender would lend more, the projection stops.

Sources