Confused about primary residence exemption

LappAcc · ‎April 09, 2024

I have a couple that has built a cottage in 2016. As well they have owned a house since 1971. they sold the cottage for 770,000 in 2023. They put about 420, 000 into the cottage building it. So looks like a healthy gain on it. They have shared the usage between the house and the cottage for the last 6 years after the cottage was built. They would like to claim the cottage as a personal residence and claim the exemption to avoid the capital gains. I believe I can do that, but my question is, how is the other house treated. Not sure if I need a fair market value of the house at 2016 or when they sell it. and do the process over again less the years claimed for the cottage..hence my confusion

Thanks

janisbossenberry · ‎April 15, 2024

They can claim it as a principal residence if they did stay in it regular, as you stated. When they eventually sell the other residence, they principal residence exemption on that house will be prorated based on the number of years owned less the number of years the exemption was used on another property. Fair market value will not enter into the calculation for the exemption.