Real Estate

Principal Residence and Renting Out: Condo vs. Furnished Basement

  • Last Updated:
  • Sep 14th, 2018 2:54 pm
Sr. Member
Oct 19, 2005
639 posts
40 upvotes

Principal Residence and Renting Out: Condo vs. Furnished Basement

Folks,

I'm looking at potentially purchasing my first Real Estate Property and curious what your advice might be in regards to using the Principal Residence Exemption (PRE) for Capital Gains.
Here are the options:

My objective
Optimize my return on money by buying a place that will appreciate and enable me to potentially sell it down the line. I dont have any particular timelines (no family) and happy to sell in 2 years or 8 years.

My situation
I'm a consultant and work 80% of time in the states - US employee in fact. The 20% + Weekends I intend to come back to Toronto maybe 80% of time. Have a girlfriend here so could potentially stay with her when I am here. I am currently renting downtown Toronto for $1700 a 1+1 spot w/ parking for which market rate is about $2,200. So I am thinking maybe my gf could move into my place where I am now

Option 1
Purchase Condo and Rent it out immediately - can delay rent out if needed for tax purposes in order to qualify for the PRE. I am thinking if I can rent out the condo for lucrative amount vis-a-vis my mortgage payments then I can basically stay in my current rented suite. My girlfriend could move into my current place and I could transfer lease I guess into her name as 4 days a week I am in the states. I know there is some "Four year exemption" whereby I dont need to inhabit it but can still claim the PRE.

Option 2
Purchase a house where I will have three options: a) occupy it fully, b) occupy main and top floors but rent out basement, or c) rent out the whole thing. Option a) isn't my preferred route at this time as I dont want to kill myself with mortgage payments (please assume I can still pay it for a year or so even if I struggle getting a tenant initially). I presume c) is similar to the Condo Option - can I use that 4 year thing there? However, from my reading online it is that b) gets tricky.


Interested to hear everyone's thoughts on this.

Thanks.
5 replies
Deal Addict
Mar 3, 2018
3476 posts
3998 upvotes
GTA
With Option 1 you will have to reside in the condo first before qualifying for the 45(2) election exemption. Means changing residence address for license, OHIP etc. as proof if challenged by CRA. After 4 years if you don’t move back in capital gains tax becomes an issue.

With Option 2 renting out the basement (b) would not be subject to capital gains. As long as you make no structural changes and no CCA (depreciation) claim on the building. Fully renting it out will be like the condo for tax purposes.
Deal Fanatic
Mar 21, 2010
6738 posts
3998 upvotes
Toronto
patron wrote: I'm looking at potentially purchasing my first Real Estate Property and curious what your advice might be in regards to using the Principal Residence Exemption (PRE) for Capital Gains.
If you're considered a non-resident of Canada for tax purposes, you are not eligible for the PRE and you cannot claim a permanent residence in Canada at all.

Are you a Canadian non-resident for tax purposes? Not a given - on the one hand it sounds like you will spend the majority of the year outside Canada, you are employed full-time outside Canada by a non-Canadian employer, you haven't stated that it's for a term contract and you'll come back after that. On the other hand you have a girlfriend (common-law? Would make a difference), possibly other family in Canada, etc.

Of course if you are a resident of Canada for tax purposes, you will also have to deal with Canadian tax issues for all your US income as well.
Sr. Member
Oct 19, 2005
639 posts
40 upvotes
DaveTheDude wrote: With Option 1 you will have to reside in the condo first before qualifying for the 45(2) election exemption. Means changing residence address for license, OHIP etc. as proof if challenged by CRA. After 4 years if you don’t move back in capital gains tax becomes an issue.

With Option 2 renting out the basement (b) would not be subject to capital gains. As long as you make no structural changes and no CCA (depreciation) claim on the building. Fully renting it out will be like the condo for tax purposes.
Just so I am clear - how long do I have to live in the newly purchase condo before I can rent it out such that I can apply the PRE? And secondly, is basically what you are saying is that the sequence of steps I would have to go through is 1) Buy new condo, 2) switch all my addresses to new the condo, 3) stay like that for X months so that it qualifies for PRE, 4) move out of the condo and back into maybe my apartment, 5) switch my address again ,and 6) then finally rent it
Sr. Member
Oct 19, 2005
639 posts
40 upvotes
Manatus wrote: If you're considered a non-resident of Canada for tax purposes, you are not eligible for the PRE and you cannot claim a permanent residence in Canada at all.

Are you a Canadian non-resident for tax purposes? Not a given - on the one hand it sounds like you will spend the majority of the year outside Canada, you are employed full-time outside Canada by a non-Canadian employer, you haven't stated that it's for a term contract and you'll come back after that. On the other hand you have a girlfriend (common-law? Would make a difference), possibly other family in Canada, etc.

Of course if you are a resident of Canada for tax purposes, you will also have to deal with Canadian tax issues for all your US income as well.
Yup will be tax resident of Canada and have a TN visa (meaning it expires in like 2 years I think). My firm has lawyers taking care of the tax headaches for me
Deal Addict
Mar 3, 2018
3476 posts
3998 upvotes
GTA
patron wrote: Just so I am clear - how long do I have to live in the newly purchase condo before I can rent it out such that I can apply the PRE? And secondly, is basically what you are saying is that the sequence of steps I would have to go through is 1) Buy new condo, 2) switch all my addresses to new the condo, 3) stay like that for X months so that it qualifies for PRE, 4) move out of the condo and back into maybe my apartment, 5) switch my address again ,and 6) then finally rent it
Essentially you have the steps correct. How long do you initially stay in the condo? Depends as CRA does not address that specifically. A month may seem unreasonable and challenged as tax avoidance. Whereas six months is more convincing.

Also as previously mentioned by other posters you have to be a resident of Canada for tax purposes and cannot claim CCA on the property during the 4 year election perid.

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