Personal Finance

Did I do the right thing for claiming CCA on rental property?

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  • Apr 11th, 2017 1:28 pm
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[OP]
Deal Addict
Jan 22, 2009
2848 posts
708 upvotes

Did I do the right thing for claiming CCA on rental property?

I purchased a house couple years ago for 300k. I rented it out in 2016 and earned a net rental income (rental income - all rental related expense) of 2k. But, the housing market in my area is crushing. I have seen my neighbors selling their house for under 300k. I entered 300k as UCC for the house, and I claimed CCA for my 2016 tax rental to decrease my rental income to 0, and my tax return increased by $600.

The reason I did that:
1) I will sell the house in the next few years because it's getting harder and harder to find renters. And I don't think I can sell it at a higher price.
2) Even if I sell it at a higher price than 300k, I don't think the profit + recapture will move me to a higher tax bracket at the year of selling.

Let's assume the following 2 cases:
1) I sold the house for 290k. Since I claimed CCA, the value of my house is 300k - 2k = 298k. My loss is 298k - 290k = 8k which can be deducted from my income in the year of sell, am I correct?
2) I sold the house for 310k. So my total gain is 310k - 298k = 12k. My income for that year will increase by 12k. Since these 12k won't move me to a higher tax bracket, I just pay the extra tax (at same tax rate) for the 12k, right? So it does not hurt me to claim CCA in the previous years, I just pay the extra tax credits I received in the previous year back. Am I correct?

I'm a noob in terms of dealing with CCA and UCC of the rental property, so I took a risk for claiming it. Experts please tell me, given my situation, did I do the right thing?
7 replies
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Aug 4, 2003
2789 posts
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braveblade wrote: I purchased a house couple years ago for 300k. I rented it out in 2016 and earned a net rental income (rental income - all rental related expense) of 2k. But, the housing market in my area is crushing. I have seen my neighbors selling their house for under 300k. I entered 300k as UCC for the house, and I claimed CCA for my 2016 tax rental to decrease my rental income to 0, and my tax return increased by $600.

The reason I did that:
1) I will sell the house in the next few years because it's getting harder and harder to find renters. And I don't think I can sell it at a higher price.
2) Even if I sell it at a higher price than 300k, I don't think the profit + recapture will move me to a higher tax bracket at the year of selling.

I'm a noob in terms of dealing with CCA and UCC of the rental property, so I took a risk for claiming it. Experts please tell me, given my situation, did I do the right thing?
I do not see any big concerns from tax minimization perspective given you intend to sell the property fairly soon. Recapture is a bigger concern over a longer duration when it might bump your tax bracket. Might as well take advantage of the CCA to lower your taxes payable now and in the end it will be wash I think in terms of taxes owing later.
Loose lips sink ships. | Her Majesty's Naval Service
[OP]
Deal Addict
Jan 22, 2009
2848 posts
708 upvotes
McMaggot wrote: I do not see any big concerns from tax minimization perspective given you intend to sell the property fairly soon. Recapture is a bigger concern over a longer duration when it might bump your tax bracket. Might as well take advantage of the CCA to lower your taxes payable now and in the end it will be wash I think in terms of taxes owing later.
Thank you! That's the way I understand it. Since the selling of the property won't move me to a higher tax bracket, I claimed CCA to get the extra return for the current year. If I sell it later for higher (but not moving me to a higher tax bracket), I just pay the extra return I got from the previous year back.
Member
Aug 17, 2008
466 posts
191 upvotes
Quebec
braveblade wrote:

2) I sold the house for 310k. So my total gain is 310k - 298k = 12k. My income for that year will increase by 12k. Since these 12k won't move me to a higher tax bracket, I just pay the extra tax (at same tax rate) for the 12k, right? So it does not hurt me to claim CCA in the previous years, I just pay the extra tax credits I received in the previous year back. Am I correct?

actually you will have a capital gain of 10k, 50% taxable so 5k +2k or recapture.
[OP]
Deal Addict
Jan 22, 2009
2848 posts
708 upvotes
sr79 wrote: actually you will have a capital gain of 10k, 50% taxable so 5k +2k or recapture.
Thanks! I read another article on taxtip. It says the taxable amount is the years which I am at a principal resident. So for example, I lived in my place for 2 years, then I rented it out for 3 years, then the taxable amount is capital gain/2 * 3/5. Is it correct?
Deal Addict
Nov 13, 2013
1871 posts
807 upvotes
Ottawa
braveblade wrote: Thanks! I read another article on taxtip. It says the taxable amount is the years which I am at a principal resident. So for example, I lived in my place for 2 years, then I rented it out for 3 years, then the taxable amount is capital gain/2 * 3/5. Is it correct?
Actually no. You are supposed to do an estimate on the value when you switched use. You can also deduct expenses so if you used a real estate agent you probably wont have any capital gain and even a loss.
Deal Addict
Jun 12, 2015
2139 posts
741 upvotes
Ontario
There was a change in use from personal to income producing. You can elect to have the property as principal residence up to maximum of 4 years. Assume you only pick that residence and you did not claim CCA. In this case, you said you claimed CCA so this doesn't apply.
[OP]
Deal Addict
Jan 22, 2009
2848 posts
708 upvotes
Dynasty12345 wrote: There was a change in use from personal to income producing. You can elect to have the property as principal residence up to maximum of 4 years. Assume you only pick that residence and you did not claim CCA. In this case, you said you claimed CCA so this doesn't apply.
Yeah I thought about this one. In my case, I rented it out starting Sep 2015. If I want to elect it as principal residence, I should done it before May 2016. According to CRA, I still can make the election this year (assume I didn't claim CCA), but the penalty is $100 per month starting May 2016, so $1200 in total to make the election. I don't think I want to do that. I should have done it last year, but I knew nothing about it last year. My bad.

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