Real Estate

Rental Property financing

  • Last Updated:
  • Aug 17th, 2019 10:17 am
[OP]
Newbie
Jan 8, 2014
24 posts
9 upvotes
Toronto

Rental Property financing

Hi,

I would like some advise on a rental property and mortgage interest write-off.

I am receiving a property (currently their principal residence) from my parents as a gift with $1 value on transfer. After the property is transferred, I plan to add the maximum allowable mortgage (80%) to be able to write off the mortgage interest.

Since I am receiving the property as a gift, the "cost" on paper would be $1. Would the $1 cost cause any problems when I claim mortgage interest expense on the rental? Will this be flagged as income splitting?

Thanks in advance for your advice!
12 replies
Jr. Member
Feb 19, 2019
193 posts
148 upvotes
Stouffville ON
Did you talk to an accountant? You should.
Your parents are disposing principal residence at $1 (they would not pay any tax on gain since it is their principal residence), now your cost for the rental property will be $1, and when you sell it the capital gain will be based on the difference between the selling price and cost, so full amount taxed.
That's just the beginning of the issues for you, whole lot more to discuss with non-arms length transactions.
Full Service / Rebate Realtor.
[OP]
Newbie
Jan 8, 2014
24 posts
9 upvotes
Toronto
Thanks for your reply senasena.

Why would I pay capital gains on the difference between market value and $1. Based on my research, when a house is converted into an investment property, the "market value" is recorded as the cost.

I am not sure what you mean by non-arms length transaction. Can you clarify?
Sr. Member
Feb 23, 2005
871 posts
23 upvotes
senasena wrote:
Aug 14th, 2019 11:30 am
Did you talk to an accountant? You should.
Your parents are disposing principal residence at $1 (they would not pay any tax on gain since it is their principal residence), now your cost for the rental property will be $1, and when you sell it the capital gain will be based on the difference between the selling price and cost, so full amount taxed.
That's just the beginning of the issues for you, whole lot more to discuss with non-arms length transactions.
That is not true.

Generally, when you transfer assets between family members, who are not dealing with each other at arm’s length, the transfer is deemed to take place at fair market value. It does not matter what the assigned value is, which is $1 in this situation.
[OP]
Newbie
Jan 8, 2014
24 posts
9 upvotes
Toronto
The assigned value ($1) would be for saving land transfer taxes
Jr. Member
Mar 1, 2016
136 posts
49 upvotes
What do you plan to use the proceeds from the mortgage for? They must be used to generate income for the interest to be tax deductible.
Newbie
Aug 11, 2019
7 posts
2 upvotes
Speak to an accountant first. Someone who charges $$$ and will give you the best way to structure this deal.

Your future capital gain/tax implications of buying for a $1 far exceeds the benefits from the potential savings on the land transfer tax.
Also, depending on the municipality/province the land transfer tax will be based on full market value as it is an arm's length transaction (when your parents/sibling/children sell or buy from you)

The interest on the mortgage of the new rental property will also only be tax deductible if you use that money to invest into something else.
(Eg, you can't use that money to buy your principle residence or pay off your own student loans, car loans, credit card loans, etc...)

My suggestion: if FMW is $500,000. Make the transaction at $500,000, pay the applicable land transfer tax.
Don't get a mortgage until you know exactly what you are going to do with the money.

(Also I am not an accountant)
Deal Fanatic
User avatar
Mar 23, 2008
9535 posts
5949 upvotes
Edmonton
mastersh4h wrote:
Aug 14th, 2019 11:58 am
Thanks for your reply senasena.

Why would I pay capital gains on the difference between market value and $1. Based on my research, when a house is converted into an investment property, the "market value" is recorded as the cost.

I am not sure what you mean by non-arms length transaction. Can you clarify?
"Non-arm's length transaction" means that a transaction between two entities that are not at "arm's length", which means they're related/associated to each other in some way. As in your case, the transaction occurring between family members, between close friend's, etc. Basically, you're getting a deal based on love/affection/whatever, not on the financial consideration going back and forth.

You can take a look at this article as well. And you really should be going through a lawyer/accountant for all this, as a lot of this is dependent on your particular situation.
https://www.moneysense.ca/save/taxes/tr ... ids-for-1/

Also read these articles:
http://www.thebluntbeancounter.com/2013 ... amily.html
https://www.fbc.ca/knowledge-centre/wha ... mily-gifts
Avoid Double Tax With a Gift
In such a case, the family as a whole might end up paying double tax on a portion of any accrued capital gains. That's because the recipient will also be taxed again on that portion of the gains between his or her actual cost and the FMV at the time of transfer which you will have already reported.

On the other hand, there also is a downside to giving property to a family member for a stated value that is higher than its FMV, as the family member's deemed cost will be adjusted downward to the FMV. Your proceeds of disposition for the property would still equal the actual selling price you had set on the property at the time of the transfer.

However, if you make an outright gift of the property to your family member, the family member's cost is "bumped" up to the fair market value, thereby avoiding this double-tax issue.

Making the gift or transfer of property to your spouse, as opposed to a child or other family member, usually will automatically occur on a tax-free basis, unless you elect otherwise. However, you and your spouse must both be Canadian residents at the time of the transfer.
Based on these articles (and this is why you should talk to an accountant/lawyer and not take advise from an anonymous Internet forum), your PARENT's would be deemed to have transferred the property at FMV. But because it's their principal residence, there's no issue with that.

You, on the other hand, will be deemed to have received the property at the price you paid, which is $1. So if you turned around and sold the property the next day, you'd have a capital gain of whatever you sold the property for, minus $1. You might save money on the LTT, but you may get nailed by capital gains.

C
Deal Addict
User avatar
Jan 2, 2012
3084 posts
950 upvotes
Toronto
mastersh4h wrote:
Aug 14th, 2019 1:01 pm
The assigned value ($1) would be for saving land transfer taxes
You better make sure both the Ontario and Toronto portion of land transfer tax just uses the sale price and not a fair market value of the home.
You can also look at them gifting the home to you as opposed to selling for $1.

There are lots of potential issues here, you really should speak to an accountant or even estate lawyer to see how these things are taxed and potential impact on capital gains. I'm sure it happens quite often as family members get older and want to pass their property on to children.
[OP]
Newbie
Jan 8, 2014
24 posts
9 upvotes
Toronto
My lawyer told me that land transfer tax will not apply as long as there is no mortgage or HELOC on the property.

My main confusion is with the capital gains and mortgage interest deduction for the rental. I spoke to 2 accountants (CPAs) and both provided conflicting answers.... The internet is full of so many confusing articles regarding this topic. I will have to keep digging i guess.
Deal Addict
Jan 2, 2015
1595 posts
850 upvotes
I would definately speak to a lawyer or accountant. We just dealt with this in a different province. But you need to make sure that you have a record of the fair market value otherwise you will paying tax on the amount between $1 and what ever it’s worth in the future.

That was what bth our lawyer and accountant told us. They said putting $1 transfer price can be done but causes a lot of problems later if not done properly. We don’t have transfer tax on my province so we were advised to use the highest fair market value possible.
On a 'smart' device that isn't always so smart. So please forgive the autocorrects and typos. If it bothers you, then don't read my posts, but don't waste my time correcting me. If you can get past the typos, then my posts generally have some value.
Member
Jun 19, 2007
469 posts
221 upvotes
Halifax
Not possible to live in it for a year or two, enjoy the capital gains free PR exemption, then rent it out, using the new, fair market value as the baseline?
Sr. Member
Mar 3, 2018
906 posts
678 upvotes
GTA
CRA will deem the transfer at FMV since it is non arms length. Otherwise you could put a value of $2M to be your adjusted cost base and reduce any future capital gains. Recommend getting an appraisal for the FMV on the date of transfer.

Also funds from any mortgage taken out must be used for investment purposes to be deductible. If you use the funds to purchase your own residence or pay off your personal mortgage it won’t be deductible. Their is a workaround called the Smith maneuver that has a big thread on RFD.

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