Converting rental property to personal use

Nov 13th, 2007 9:45 am

#1

BHA1: Member; Aug 8, 2005; 418 posts; 64 upvotes; Toronto

Nov 13th, 2007 9:45 am

Converting rental property to personal use

I have a second home which I purchased in the summer of 2003 and have been renting out. Paid $95k for it. Current sale prices are really arbitrary since it's located in a small town and there are really no two properties the same. It is a waterfront town and there are huge differences depending on where you are located (waterfront or not).

I might get $150k if I sold the property today, but the same property goes for $200k (waterfront) and $90-95k (more inland than I am).

I was thinking of converting the property back to personal use since I've only owned it a few years and the area is really increasing in value quickly. If I ever sell it (never plan to) it would become my personal residence for a few years so I wouldn't pay any capital gains on it.

Some questions:
1. Since it is operated as a "rental property" what do I need to do for the CRA to convert it? Is there an actual form that needs to be filled out, or do I just stop declaring it as a rental property (ie. put an end date to the rental on this year's tax return)?

2. I would likely be able to show similar properties selling in the $100-115k range which should certainly look reasonable to CRA ($20% gain in 4 years isn't out of the ordinary at all!). I assume a letter from a realtor + copies of a few similar listings would be all the documentation I need?

3. I assume it makes sense to convert it on Jan 2nd 2008 so I'm not really liable for the capital gains on the property till April of 2009? On a side note, I am doing a whole bunch of property renovations/landscaping ($25-30k) to the property in early 2008 which I could write off.... should I do those first, write them off (therefore 2008 would be a HUGE loss) then "close up shop" as a rental? 2003/2004 were loss years (audited and agreed to by CRA), 2005 was a loss (never audited), 2006 was profitable (but only by $3k or so) and 2007 will likely be profitable (by a small amount only). So with 2 years of profits (of course overshadowed by decent sized losses the first few years) am I safe to have this big loss in the "two weeks I ran it as a rental property in 08"?

Some notes:
-Obviously I'm trying to convert it at as low a price as possible, since I'm paying capital gains on 50% of the difference between purchase and sale prices so I want to narrow that gap as much as possible.

Thanks!

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Nov 13th, 2007 10:45 am

#2

Bullseye: Deal Fanatic; Feb 1, 2006; 9099 posts; 215 upvotes

Nov 13th, 2007 10:45 am

You're looking for trouble if you actually expect to be able to do all this based on advice given for free here. Far too involved for the type of casual guidance that is usually expected from asking here. This is not something you want to mess around with or cheap out on, go see an accountant to do it properly.

Nov 13th, 2007 1:45 pm

#3

sunnybono: Deal Fanatic; Nov 13, 2005; 5670 posts; 162 upvotes; GTA

Nov 13th, 2007 1:45 pm

bhatt wrote: ↑
Nov 13th, 2007 2:45 pm
I have a second home which I purchased in the summer of 2003 and have been renting out. Paid $95k for it. Current sale prices are really arbitrary since it's located in a small town and there are really no two properties the same. It is a waterfront town and there are huge differences depending on where you are located (waterfront or not).

I might get $150k if I sold the property today, but the same property goes for $200k (waterfront) and $90-95k (more inland than I am).

I was thinking of converting the property back to personal use since I've only owned it a few years and the area is really increasing in value quickly. If I ever sell it (never plan to) it would become my personal residence for a few years so I wouldn't pay any capital gains on it.

Some questions:
1. Since it is operated as a "rental property" what do I need to do for the CRA to convert it? Is there an actual form that needs to be filled out, or do I just stop declaring it as a rental property (ie. put an end date to the rental on this year's tax return)?

2. I would likely be able to show similar properties selling in the $100-115k range which should certainly look reasonable to CRA ($20% gain in 4 years isn't out of the ordinary at all!). I assume a letter from a realtor + copies of a few similar listings would be all the documentation I need?

3. I assume it makes sense to convert it on Jan 2nd 2008 so I'm not really liable for the capital gains on the property till April of 2009? On a side note, I am doing a whole bunch of property renovations/landscaping ($25-30k) to the property in early 2008 which I could write off.... should I do those first, write them off (therefore 2008 would be a HUGE loss) then "close up shop" as a rental? 2003/2004 were loss years (audited and agreed to by CRA), 2005 was a loss (never audited), 2006 was profitable (but only by $3k or so) and 2007 will likely be profitable (by a small amount only). So with 2 years of profits (of course overshadowed by decent sized losses the first few years) am I safe to have this big loss in the "two weeks I ran it as a rental property in 08"?

Some notes:
-Obviously I'm trying to convert it at as low a price as possible, since I'm paying capital gains on 50% of the difference between purchase and sale prices so I want to narrow that gap as much as possible.

Thanks!

The first thing you need to do is get an independant appraisal done on the rental property indicating its value at the time of change in use (from rental to principal residence). Although I would do as Bullseye suggested, and that is consult a Tax accountant for advice, but my gut feeling would be that when you file your tax return you would incorporate the deemed disposition of the rental to your capital gains section (50% ($200k-$95k)) or $52.5K would be taxable. Your principal residence proceeds would remain 100% tax free.

Nov 13th, 2007 4:58 pm

#4

grant: Deal Fanatic; Aug 19, 2001; 5086 posts; 27 upvotes; Vancouver

Nov 13th, 2007 4:58 pm

bhatt wrote: ↑
Nov 13th, 2007 2:45 pm
If I ever sell it (never plan to) it would become my personal residence for a few years so I wouldn't pay any capital gains on it.

I think you get this, but to be clear, you will only be exempt from capital gains only for the years that you declare it as your personal residence.

1. Since it is operated as a "rental property" what do I need to do for the CRA to convert it? Is there an actual form that needs to be filled out, or do I just stop declaring it as a rental property (ie. put an end date to the rental on this year's tax return)?

Just put the end-date on your rental income schedule.

I assume a letter from a realtor + copies of a few similar listings would be all the documentation I need?

Maybe? If you hire an independent appraiser you will be on very strong ground to support your claims. A letter from a realtor is probably good. Listings are kind of weak. The whole point is to defend whatever amount you happen to declare as capital gains should the CRA ever ask questions.

3. I assume it makes sense to convert it on Jan 2nd 2008 so I'm not really liable for the capital gains on the property till April of 2009?

It makes more sense to elect to defer paying capital gains until you actually sell the property (under Subsection 45(3) of the Income Tax Act).

If i recall correctly you simply include a letter stating the above in whichever tax return the gains would be owed on.

I am doing a whole bunch of property renovations/landscaping ($25-30k) to the property in early 2008 which I could write off....

Be careful what you mean by "write off" ... renovations are added to the ACB of your commercial property, they are not expenses.

am I safe to have this big loss in the "two weeks I ran it as a rental property in 08"?

You are safe as long as you are honest and document everything.
Trying to claim capital purchases (i.e., renovations & landscaping) as expenses is NOT legitimate and could easily land you in trouble.

-Obviously I'm trying to convert it at as low a price as possible, since I'm paying capital gains on 50% of the difference between purchase and sale prices so I want to narrow that gap as much as possible.

The CRA knows this which is why an appraisal is a good method to determine that price; they are more trusting of an independent professional than of someone who cherry-picked local listings to support their claim.