Due to the current context, many Quebecers dream of escaping from their home to see new horizons. Cottages and second homes are therefore very popular.
If you had planned to sell your second home in the near future, know that there is still time to take advantage of the excitement of the market. However, a few things should be considered before going ahead with your sales plan. This is not a decision to be taken lightly, especially because it can have a huge impact on your wallet.
So here are some factors to know before going ahead with your sales plan.
Showcase your property to sell better
As in all real estate projects, it is not enough to display your property and hope it will sell by itself. You wouldn't sell your home without doing some touch-ups to make it look its finest. This also applies to your cottage or any other type of residence in your possession.
Even if they are in demand, second homes need a little help to find their next buyer. You will therefore have to take a minimum of time to make sure you put yours in value, whether it is by giving a new coat of paint, by modernizing the decor or by practicing some home staging techniques to arouse a crush among the potential buyers.
The pre-sale renovation
In some cases, you may also need to make some renovations, more or less important, to improve the general condition of your cottage. This is all the more true if you have not paid special attention to your home for some time. A home in poor condition is usually shunned by buyers. You will put all the chances on your side by taking care of the defects requiring your intervention.
If you don't know where to start, you may want to seek professional advice by requesting a presale inspection. A home inspector will then come to examine your property, which will allow you to have the correct information on the various works to be done before making your home available on the market.
A careful buyer will require an inspection before acquiring real estate. By anticipating his request, you will not only demonstrate your good faith, but you will also be able to correct the most important problems. This will avoid having to lower your selling price and improve your chances of closing the transaction faster.
Obviously, this will require a greater or lesser investment of time and money, depending on the defects you will discover. But keep in mind that this is a preventative measure that you will benefit from.
The tax implications of selling your second home
The financial impact of your chalet is undoubtedly the most important point to consider before going ahead with your sale project. Indeed, from a tax point of view, there is a major difference between a main residence and a second home. The sale of the latter could be very expensive depending on the profits you will have made since the date of purchase of your property.
If you own more than one home, you must remember this: when filing your income tax return, you can determine which property you want to designate as your main residence. When selling a home designated as "primary" for one or more years, the capital gain could be partially or fully tax exempt, unlike a second home. So if your cottage has valued more than your home since you bought it, it would likely be beneficial to designate it as your primary residence.
Note, however, that you can only indicate one main residence for each of the years in which you are the owner. You cannot, for the same year, designate more than one main residence. In the case of a couple, for example, the chosen home must be the same. It cannot be different.
If you decide to keep the second home title for your cottage or property, be aware that you could end up with a large tax bill to pay when it is sold.
Things to know about capital gain
The capital gain is the increase in the value of your property between the time you acquire it and the time you dispose of it. In other words, it is the difference between the sale price and the original purchase price, less some deductible expenses.
If you decide to sell your second home, be aware that you will have to add 50% of the capital gain realized on the sale to your annual income tax return. Half of the profits obtained will therefore be taxable.
So if you bought a cottage for $100,000 several years ago, you have no deductible expenses and it is now worth $250,000, the capital gain will be $150,000. Half of this amount will be taxable. You will need to include a gain of $75,000 on your income tax return.
And for those who hope to save taxes by transferring their second home at a ridiculously low price to someone they know, be aware that this is a very bad idea.
Possible deductions
When selling your second home, you may still be able to deduct some of your expenses from the capital gain obtained, in order to reduce your tax bill. This is the case for the commission paid to a real estate broker or for certain work that you have done at your cottage over the years.
However, not all renovations are eligible: those that can be deducted must be used to improve the building, by adding a garage for example and not simply to maintain it and repair what breaks naturally over time. Also be sure to keep invoices for the improvements so that you can prove what renovations were made and what their cost was.
Let's go back to our previous example: you bought a cottage for $100,000 several years ago and invested $30,000 in major renovations. Your property is now worth $250,000. Here is the calculation that will be performed to obtain the amount of the capital gain:
Sale price ($250,000) - purchase price including renovations ($130,000) = $120,000
The realized capital gain will therefore be $120,000 and 50% of this amount will be taxable. A total of $60,000 will need to be included on your income tax return, as opposed to $75,000 without applicable deductions.
Because it can have a significant impact on your taxation, the sale of your second home should not be taken lightly. It is also recommended to do business with a professional in the field, such as a tax expert or a financial planner. They will be able to ensure that the designation of your homes is optimized and help you make the best decision according to your situation.
Work with real estate professionals to properly sell your second home
In addition to calling in a professional to help you better understand the tax implications of your decision, it is strongly recommended that you work with real estate experts to facilitate your sales project.
A real estate broker is, among other things, one of the best allies to have by his side for any purchase or sale of real estate. Choosing an expert with a good knowledge of the region in which your second home is located is a major asset for your project. He will know how to showcase your property and how to give it the best possible visibility. You will be sure to sell your home at the ideal price and as soon as possible.
Looking for a real estate broker to help you sell your second home?
XpertSource.com can help you find a real estate broker. When you tell us about your project, we put you in touch with qualified resources for free. Simply fill out our form (it only takes a few minutes) and we will connect you with professionals.
