The vendor can only defer a portion of the Capital Gains taxes if he takes a vendor take back mortgage. How does this work?
Well, you can elect to defer the taxes on the ratio of the portion monies collected to the total capital gains over a maximum of 5 years with 20% of the profit in each year.
Lets walk through an example. Say you bought a property for $100,000. This property was not your primary principal residence and hence you have to pay taxes on the capital gains. You sell the property for $250,000. You take back a mortgage of $150,000 repayable in 10 annual payments of $15,000 each
So in summary:
Cost is $ 100,000
Selling Price is $ 250,000
Capital Gain is $ 150,000
Initial Proceeds are $ 100,000
Vendor Take Back $ 150,000
1/5 of Capital Gain is $ 30,000
Annual Payment is $ 15,000
The amount of capital gains you can defer and have to take into income in each of the years is as follows:
In the year when you sell you can defer Lower of:
a) $150,0000 / 250,000 x 150,000 = $90,000
VTB / Total Proceeds Capital Gain
b) $150,000 (Capital Gain) x 80% = $120,000
Therefore in year one, the vendor's deferral will be $ 90,000 and he has to report $60,000 in capital gain (only ½ of this is taxable).
In year 2 the deferral shall be the lower of
a) $135,0000 / 250,000 x 150,000 = $81,000
VTB / Total Proceeds Capital Gain
b) $150,000 (Capital Gain) x 60% = $90,000
In year 2 the vendor has to report $9,000 ($90,000 Balance to report - $81,000)
In year 3 the vendor has to report
a) $120,0000 / 250,000 x 1 50,000 = $72,000
VTB / Total Proceeds Capital Gain
b) $150,000 (Capital Gain) x 40% = $60,000
In year 3 the vendor has to report $21,000 ($81,000 - $60,000)
In year 4
a) $105,0000 / 250,000 x 150,000 = $63,000
VTB / Total Proceeds Capital Gain
b) $150,000 (Capital Gain) x 20% = $30,000
In year 4 and 5 the vendor has to report $30,000 in each of the years
