Capital Gains Tax

Capital Gains Taxes and Reverse Mortgages

Good news first: capital gains taxes do not apply to your principal residence — and that hasn’t changed. Reverse mortgages are only available on the home that is your principal residence (the home you live in). So, if you’re considering a reverse mortgage on your main home, there is absolutely no capital gains tax to worry about, and the recent 2024 rule changes do not affect that fact.

Who actually pays capital gains tax?

Capital gains taxes only apply when you sell properties that are not your primary residence — think investment properties, cottages, vacation homes, or any second, third (or fourth!) house. Having a mortgage on a property doesn’t change whether capital gains tax applies; the tax is based on the profit from the sale, not on whether there’s a mortgage attached.

The 2024 updates didn’t introduce a new tax; they adjusted existing rules by increasing the inclusion rate in certain situations, which can raise tax payable on larger gains. The main target of these changes was corporations that used old rules to reduce tax liability — not homeowners selling the house they live in.

Simple examples (personal tax rate assumed at 30%)

1. Primary home you lived in 30 years

• Bought $500,000, sold $750,000 → No capital gains tax under old or new rules. You keep the full $1M (used to pay off any mortgage, including a reverse mortgage).

2. Cottage (2nd home) — bought $500,000, sold $750,000

• Gain $250,000 → Old and new rules produce the same tax here: $37,500. You keep $962,500.

  • Calculation: $250,000 x 50% inclusion rate x 30% tax rate

3. Cottage (2nd home) — bought $500,000, sold $850,000

• Gain $350,000 → Under old rules tax ≈ $52,500; new rules increase that to ≈ $57,300. You’d keep $797,500 (old) vs $792,700 (new). The difference reflects the higher inclusion rate for gains above $250,000.

  • Calculation: $250,000 x 50% inclusion rate x 30% tax rate + $100,000 x 66% inclusion rate x 30% tax rate

What this means for reverse mortgages

• Reverse mortgages apply only to the home you live in. Because principal residences remain exempt from capital gains tax, reverse mortgages are unaffected by these tax rule changes.

• If you use proceeds from a principal-residence sale (regular or reverse mortgage payoff), you will not owe capital gains tax on that sale.

• If you own additional properties, capital gains may apply when those properties are sold. Although this is unrelated to a reverse mortgage on your main home, it might make it less profitable to sell the property making alternatives like reverse mortgages more viable.

Final Thoughts

• Principal residence = no capital gains tax!

• The 2024 changes slightly increase taxes on large gains from non-primary properties, but they do not affect reverse mortgages or the sale of the home you live in.

• The people most affected are a small group: owners of multiple properties who sell a non-primary home with gains over $250,000 (or certain corporations).

Free Professional Consultation

If you have any unanswered questions, uncertainties or would like to go over your specific financial needs and goals, please contact me at mike.a@reversemortgageportal.ca to set up a call. As a CPA, Chartered Professional Accountant, of over 20 years, I know the importance of understanding the full picture before making recommendations. I look forward to learning more about you and your financial needs so I can help you make the best decision.

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