Disposal of real estate – Special rules

Question 1

Disposal of real estate – Special rules

Answer 1

Real estate (real property) will generally be comprised of two separate assets – land, and building(s).
* When real estate is disposed, the allocation of the proceeds will have a significant effect on taxable income:
* Maximizing proceeds allocated to land can generate capital gains which are one half taxable, and terminal losses on building which are fully deductible.
* If the amount of the proceeds allocated to the building is LESS THAN cost, special rules will limit the amount of terminal loss that may be claimed by calculating deemed proceeds as being equal to the building UCC
* The amount of the proceeds allocated to the land will be determined to be the actual selling price for the real estate, less the deemed proceeds for the building, effectively reducing the amount of the capital gain.

Reference: ITA 13(21.1)(a)