There is a new reporting requirement for the Principal Residence Exemption (PRE). When you sell your principle residence and use the PRE, you have to report it. First, I’ll discuss the PRE and in the next blog I’ll discuss the new report. As tax is the largest payment one makes each year, it is a good idea to have your taxes reviewed by a tax accountant.
The Principal Residence Exemption is an opportunity to keep the capital gains tax-free on your principle residence that you have owed for longer than a year, and where you have lived for at least part of that year. The PRE is most often applied to a family home. Someone buys their home, lives in it for decades, it appreciates in value, and then they sell. Usually the selling price is higher than the original purchase price. This means capital gains, and capital gains are normally taxed on 50% of the value. Governments have encouraged home ownership by exempting tax on capital gains on principle residences.
There are a few special rules for the PRE. I’ll discuss only two here. First is the 1+ rule. The PRE exempts one residence per year. What happens if you move in one year? You owned two residences for part of that year. How do you exempt both from tax? Use the 1+ rule. It adds a year of exemption from capital gains. Another rule is that you have to live in the residence. If you live in a residence, move out, but rent out the residence to tenants, you can only claim the PRE for the years you lived in it. So, for the full years that you rented out to tenants, you cannot claim the PRE on that property.
In the next blog, I’ll discuss the new reporting requirements for the Principal Residence Exemption.