Personal Finance

Renting a condo that you own (tax)

  • Last Updated:
  • Jan 23rd, 2019 2:20 pm
[OP]
Sr. Member
Jun 13, 2008
771 posts
95 upvotes

Renting a condo that you own (tax)

Let's say you bought a condo for $initalValue (primary residence) and then decide to rent it after a year.

In the eyes of the law, it's like if you sold the condo at valueA, and when you decide to stop renting it and move back in, you acquire it back at valueB.

From what I understand, you will not have to pay any capital gain tax on valueA - initialValue but you will have to pay capital gain tax on FinalValue - valueB if you decide to sell it one day. Would that be correct?

My big issue is how do you determine valueA and valueB?
22 replies
Deal Fanatic
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Mar 23, 2008
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Edmonton
bigcortex wrote:
Jan 15th, 2019 2:43 pm
Let's say you bought a condo for $initalValue (primary residence) and then decide to rent it after a year.

In the eyes of the law, it's like if you sold the condo at valueA, and when you decide to stop renting it and move back in, you acquire it back at valueB.

From what I understand, you will not have to pay any capital gain tax on valueA - initialValue but you will have to pay capital gain tax on FinalValue - valueB if you decide to sell it one day. Would that be correct?

My big issue is how do you determine valueA and valueB?
The proper thing to do is get an appraisal done at both time-points.

C
[OP]
Sr. Member
Jun 13, 2008
771 posts
95 upvotes
CNeufeld wrote:
Jan 15th, 2019 3:00 pm
The proper thing to do is get an appraisal done at both time-points.

C
Thanks.

Can't you use a linear prorata calculation?
Example:
You buy condo for $200k
After 5 years, you sell it for $250k

You rented the condo for one year. You pay capital gain tax on 10k (1/5*(250-200))
Deal Addict
Feb 9, 2013
1741 posts
545 upvotes
Mississauga
bigcortex wrote:
Jan 15th, 2019 2:43 pm
Let's say you bought a condo for $initalValue (primary residence) and then decide to rent it after a year.

In the eyes of the law, it's like if you sold the condo at valueA, and when you decide to stop renting it and move back in, you acquire it back at valueB.

From what I understand, you will not have to pay any capital gain tax on valueA - initialValue but you will have to pay capital gain tax on FinalValue - valueB if you decide to sell it one day. Would that be correct?

My big issue is how do you determine valueA and valueB?

The years that you rented are taxable, the years as primary residence are exempted

For example:

years rented = 1
years primary residence = 2
years owned = years rented + years primary residence = 3

initialValue = 100,000
finalValue = 400,000
capital gain = finalValue - initialValue = 300,000

non-taxable gain = 2/3 * (capital gain)
taxable gain = 1/3 * (capital gain)
[OP]
Sr. Member
Jun 13, 2008
771 posts
95 upvotes
jdu0ng wrote:
Jan 15th, 2019 3:13 pm
The years that you rented are taxable, the years as primary residence are exempted

For example:

years rented = 1
years primary residence = 2
years owned = years rented + years primary residence = 3

initialValue = 100,000
finalValue = 400,000
capital gain = finalValue - initialValue = 300,000

non-taxable gain = 2/3 * (capital gain)
taxable gain = 1/3 * (capital gain)
So you don't need an appraisal?
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Mar 23, 2008
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bigcortex wrote:
Jan 15th, 2019 3:11 pm
Thanks.

Can't you use a linear prorata calculation?
Example:
You buy condo for $200k
After 5 years, you sell it for $250k

You rented the condo for one year. You pay capital gain tax on 10k (1/5*(250-200))
The approach least likely to cause you problems if you got audited would be the before/after appraisals. But really, as long as you can show some form of logic applied to the numbers you came up with, I'd guess you'd be ok. But the appraisals are the least questionable. IMHO.

You could call the CRA for an answer, but I suspect they'll stick to the party line.

https://www.durhamhousevalues.ca/capita ... -appraisal
Of course, these guys make their living providing appraisals... :)

C
[OP]
Sr. Member
Jun 13, 2008
771 posts
95 upvotes
CNeufeld wrote:
Jan 15th, 2019 3:29 pm
The approach least likely to cause you problems if you got audited would be the before/after appraisals. But really, as long as you can show some form of logic applied to the numbers you came up with, I'd guess you'd be ok. But the appraisals are the least questionable. IMHO.

You could call the CRA for an answer, but I suspect they'll stick to the party line.

https://www.durhamhousevalues.ca/capita ... -appraisal
Of course, these guys make their living providing appraisals... :)

C

The big problem I see with appraisals is that it's paper money not actual money.

Imagine I buy a condo

Year 0 - Acquisition at $200k
Year 1 - Rented - Appraisal value $210k
Year 2 - I go back and live there - Appraisal value - 250k
Year 3 - Condo sold for $200k

In that case, I pay capital gain on $40k without making any money. How is that fair?
Deal Fanatic
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Mar 23, 2008
9741 posts
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Edmonton
bigcortex wrote:
Jan 15th, 2019 4:03 pm
The big problem I see with appraisals is that it's paper money not actual money.

Imagine I buy a condo

Year 0 - Acquisition at $200k
Year 1 - Rented - Appraisal value $210k
Year 2 - I go back and live there - Appraisal value - 250k
Year 3 - Condo sold for $200k

In that case, I pay capital gain on $40k without making any money. How is that fair?
You don't have to justify it to me, and I don't make up the rules. And the rules say that you're supposed to establish the FMV at the time of status change. An appraisal is the most definitive way of doing that, besides selling the property. If you want to duke it out with the CRA on how their rules are unfair, feel free. And drop us a note after to let us know how that goes. But I suspect that if you tried claiming a $0 gain from your situation and got audited, they wouldn't see things the same way you do.

C
[OP]
Sr. Member
Jun 13, 2008
771 posts
95 upvotes
CNeufeld wrote:
Jan 15th, 2019 4:14 pm
You don't have to justify it to me, and I don't make up the rules. And the rules say that you're supposed to establish the FMV at the time of status change. An appraisal is the most definitive way of doing that, besides selling the property. If you want to duke it out with the CRA on how their rules are unfair, feel free. And drop us a note after to let us know how that goes. But I suspect that if you tried claiming a $0 gain from your situation and got audited, they wouldn't see things the same way you do.

C
Shouldn’t the government rely on municipal tax assessment?

I’m definitely interested in a legal discussion.
Sr. Member
Nov 12, 2014
774 posts
519 upvotes
Kingston, ON
bigcortex wrote:
Jan 15th, 2019 4:49 pm
Shouldn’t the government rely on municipal tax assessment?

I’m definitely interested in a legal discussion.
No. Those values aren't even close to market value in most cases. If CRA audits, they will likely ask for full appraisals. Usually they accept real estate agent letters of opinion though.

Also, look up 45(2) elections.
Member
Jul 9, 2009
309 posts
10 upvotes
Toronto
Interesting topic.

If its primary residence and your renting out, how would the government know that you are renting out your primary residence?
Deal Fanatic
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Mar 23, 2008
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bigcortex wrote:
Jan 15th, 2019 4:49 pm
Shouldn’t the government rely on municipal tax assessment?

I’m definitely interested in a legal discussion.
No. Municipal tax assessment is based on "Computer Assisted Mass Appraisal" values. IOW, a municipality mass appraises 99% of the properties in their jurisdiction based on a model that someone built. One of the inputs into the model is selling prices of houses, but it's not intended as a "actual" appraisal. It's intended as a way to quickly (and cheaply) appraise properties for the purposes of distributing tax burden. It was never intended to replace an actual property assessment for the purposes of buying/selling. For example, your house could be a completely run down piece of junk with foundation cracks and shingles falling off, and it might be assessed the same as your neighbor's identical (but well maintained place).

One of the other drawbacks to (I believe) the Ontario assessments is that they're not updated regularly/linearly. You get an assessment (every 4 years?) which means that the accuracy is even lower. Here in Alberta, we get annual assessments.

https://www.mpac.ca/HowAssessmentWorks/ ... ndTaxation

C
Sr. Member
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Dec 24, 2007
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BC
bigcortex wrote:
Jan 15th, 2019 4:49 pm
Shouldn’t the government rely on municipal tax assessment?
Problem with a municipal tax assessment is that it is at a particular date, say July 1, 2018 and in a fast moving market that appraisal would be out of date within a month. What the CRA relies on like all other appraisers is some average of comparable sales within the area. That information might be a little hard to get but a real estate agent should have access to the MLS data.
Sr. Member
Jan 1, 2017
631 posts
441 upvotes
bigcortex wrote:
Jan 15th, 2019 4:03 pm
The big problem I see with appraisals is that it's paper money not actual money.

Imagine I buy a condo

Year 0 - Acquisition at $200k
Year 1 - Rented - Appraisal value $210k
Year 2 - I go back and live there - Appraisal value - 250k
Year 3 - Condo sold for $200k

In that case, I pay capital gain on $40k without making any money. How is that fair?
You won’t pay tax on $40k. In fact you will pay $0 tax since it sold only for $200k.

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