One of the tax rules that most taxpayers are aware of, though not necessarily in detail, is that there’s an exemption from tax on a gain from a sale of the house they live in. If an individual (or family) owns one house that they live in then the rules are fairly straight forward however complications arise as soon as there’s some deviations in the scenario. What the rules actually state is that the exemption is available for a housing unit that the individual or family unit ordinarily inhabits. This means that there’s a limit of one dwelling per family on which the exemption can be claimed. The designation of the exemption is done for each year that the property is owned. For example, the family owns a house for 10 years and a cottage for 5 years. The exemption is first assigned to the house as that’s the only property owned for the first five years and then a decision has to be made whether the house or the cottage gets the exemption for the 5 years that both properties are owned at the same time.
When there’s only one property then the situation is fairly simply however as soon as another property is introduced then there’s potential for a tax liability. It’s best to review all of the properties and their potential gains prior to making any elections.
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