Should gains from the sale of a house be taxed?
November 26, 2015
Tax-free capital gains from selling your house could be a mistake.
One tax rule most Canadians understand is profit from the sale of a principal residence is tax-free.
This has been a windfall for many but in hindsight, is this fair?
We will have a simple exercise of ‘follow the money’ and you decide what is right and what is wrong. Should our federal government tax gains received from you selling your house?
For many families, a house is their largest asset and the group that has benefited the most from rising prices are baby-boomers. That generation is currently aged 50 to 70 and many have owned a house for several decades.
It is not uncommon to hear that someone purchased their residence in Oakville for $200,000 and now that same house is worth close to $1-million.
This is a result of supply and demand.
After the Second World War, baby-boomers started being born in significant numbers. The economic fallout was unprecedented economic prosperity.
The economy was expanding, jobs were plentiful and the Canadian dream was fulfilled with homeownership. Now boomers are starting to cash in their chips and selling their houses at exorbitant prices to the next generation.
Fortunately, for those selling a house, the world suffered a huge economic setback in 2008 and 2009 and as a result interest rates are still historically low. Therefore the next generation of younger buyers can afford to overpay for their house because the carrying costs are relatively low.
When interest rates rise affordability, overpriced housing will suddenly be too expensive. It is predicted there will be strong pressure on prices and the value of houses could decline.
If that happens it will end up being a generational shift of financial prosperity and hardship. Baby boomers will cash out and prosper from selling their house while the younger generation will have economic hardship if house values fall.
Most people in Oakville think house values can only go up. In my opinion that is entirely incorrect. Your house is an investment and all investments have the ability to increase and decrease in value.
Looking ahead, what is next? Again, economic reality will largely be shaped by baby boomers because of the sheer size of their numbers.
Aging baby boomers are retiring and starting to require more health care. The younger generation are going to be taxed on earnings in order for free medical services to continue for an aging population.
Old Age Security payments will be given to boomers and these payments will come from taxing the younger generation during their working years. Canada Pension Plan payments are self -funding, Old Age Security payments are not.
Earlier in the article we asked your opinion on whether profits from the sale of a principal residence should be taxed. Now is the time for your answer.
To summarize, older Canadians profited from rising real estate values and are now coasting into retirement and requiring the government to support them with medical costs and Old Age Security payments. That obligation will fall on younger Canadians.
Taxing the gains made from selling a principal residence would be one strategy of transferring some of the economic prosperity of baby boomers to the government so the younger generation is not left paying all the bills for their elders.
In the spirit of fairness, there is a strong argument gains from the sale of a principal residence should be taxed.