Question

Principal Residence Designation

Since 1998, Petumala Fluffy has owned a residence in Kelowna, British Columbia. It was acquired in that year at a cost of $623,000.

In 2006, Petumala was appointed to the Senate and, because of the significant amount of time that she was required to be present in Ottawa, she acquired a second residence in that city. The cost of this residence was $426,000. In each of the subsequent years, she spent some time at each residence.

In 2017, following allegations that she had claimed and double claimed completely inappropriate travel costs, she resigned from the Senate. As this created severe financial difficulties (among other problems), she sold both residences and moved in with her mother. The Kelowna house sold for $897,000, while the Ottawa home sold for $534,000. These amounts are net of all real estate fees.

Ms. Fluffy would like to minimize any capital gain that arises as the result of selling the two properties.

Required: Describe how the residences should be designated in order to accomplish Ms. Petumala’s goal. In addition, calculate the total amount of the gain that would arise under the designation that you have recommended.

Answer 1

Principal Residence Designation :

Which can be used to eliminate or reduce capital gains araising out of sale of house. Generally home which is strictly used for residence purpose will qualify to claim Principal residence Exemption.And person or his/her family members have to be lived in that home for some period. If the house aquired to generate income then in that case , we can't claim under Principal exemption. Since a person can elect one house per year as principal residence.

Fluffy may choose From which residence she is getting more tax benifit by calculaing Exemption from both houses.

Calculation of exemption in case of Kelwona house ( House-1):

For calculating Exemption we have to use the following formula. Designating Number of years from 1998 to 2006 ( Up to aquairing second house)

A * (B/C)

Where A= Taxpayers gain , B=1+Number of years ending after the aquisition date for which the property is designated as principal residence of taxpayer and C=Number of years ending after the aquisition date for which the property during which taxpayer owned the property.

In this case A = Gain= Sale considertion-cost of acquisition = $ 897000-$623000 = $274000

B =1+(2006-1998)=9 years

C = 2017-1998 = 19 years

Principal residence exemption = $274000*9/19 = $ 129789.

Calculation of exemption in case of Ottawa house ( House-2):

In this case A = Gain= Sale considertion-cost of acquisition = $ 534000-$426000 = $108000. Designating No of years from 2006 to 2017.

B =1+(2017-2006)=12 years

C = 2017-2006 = 11years

Principal residence exemption = $108000*12/11 = $117818.

Conclusion :

Kelowna house should be designated as Principal residence of Fluffy to accompolish her goal.

Total amount of gain that would arise under above recommendation:

Gain from kelowna house                        $274000

Principal residence exemption                ( $129789)

Gain from ottawa house                           $108000

Total gain                                                 $252211.