Real Estate

Buying new house - Principal or Rental Property ?

  • Last Updated:
  • Sep 18th, 2020 5:04 pm
[OP]
Newbie
Dec 17, 2017
17 posts
3 upvotes
Ottawa

Buying new house - Principal or Rental Property ?

Hi,

Located in Ontario and planning to buy my second house as I just got approved for a mortgage refinance and I intend to use the equity+cash as downpayment on the new purchase
The intention was to move to the new house and convert my old house as a rental property,

What if I stay in my current property and use the new one as rental property, what will be the difference and any is there any tax implications in this scenario compared to the first one ?

TIA
7 replies
Deal Fanatic
User avatar
Sep 14, 2006
8578 posts
1269 upvotes
Which house will appreciate more? Keep that as principle but in all honesty, whichever one you’re renting out should be the one that is subject to capital gains when you sell later on.
TEAM CANADA!!!!!!!!!!!
Deal Guru
User avatar
Mar 23, 2008
11335 posts
7632 upvotes
Edmonton
CrazyDiamond wrote: Hi,

Located in Ontario and planning to buy my second house as I just got approved for a mortgage refinance and I intend to use the equity+cash as downpayment on the new purchase
The intention was to move to the new house and convert my old house as a rental property,

What if I stay in my current property and use the new one as rental property, what will be the difference and any is there any tax implications in this scenario compared to the first one ?

TIA
You should talk to an accountant to make sure you maximize your deductions, interest in particular.

C
[OP]
Newbie
Dec 17, 2017
17 posts
3 upvotes
Ottawa
bobbings wrote: Which house will appreciate more? Keep that as principle but in all honesty, whichever one you’re renting out should be the one that is subject to capital gains when you sell later on.
Both houses will be located in the same city so the appreciation will be most likely similar
[OP]
Newbie
Dec 17, 2017
17 posts
3 upvotes
Ottawa
CNeufeld wrote: You should talk to an accountant to make sure you maximize your deductions, interest in particular.

C
Noted, thank you
Newbie
Sep 29, 2013
39 posts
25 upvotes
CrazyDiamond wrote: Both houses will be located in the same city so the appreciation will be most likely similar
The way I understand it is...
Capital gains will have to be paid based on the amount of time that property was *NOT* your primary residence.

I.e.
- You lived in your old house for 10 years
- You move to the new house, rent the old place and sell after 10 years
- You have to pay 50% of the capital gains
Deal Fanatic
User avatar
Sep 14, 2006
8578 posts
1269 upvotes
AddictRC wrote: The way I understand it is...
Capital gains will have to be paid based on the amount of time that property was *NOT* your primary residence.

I.e.
- You lived in your old house for 10 years
- You move to the new house, rent the old place and sell after 10 years
- You have to pay 50% of the capital gains
Correct but the thing about this is that you will have to keep track of that change because the government will just see the purchase price and the selling price. They'll calculate the capital gains from that but if half of the 10 years time you are using it as your principal residence and the other half you rented it out, in theory only the latter half is subject to capital gains. The tricky part is how do you prove the value of your house from 5 years ago and not 10 years ago. 10 years ago, they know what you paid so that's easy to get but 5 years ago, you never sold it but you ended up converting it to a rental property. I had this exact conversation at work a few months ago and one of the guys said you should actually get an official appraisal so you can prove the gains is only really from year 6 to year 10. This is of course assuming the gains from year 6 onwards is less than the total gains from year 1 to 10. You would not want to do this if your purchase price was $1M in year 1 and it dipped from year 1 to 5 down to $700K and then from year 6 to 10, it went back up to $1.3M That means you will have much more gains from year 6 to 10 than years 1 to 10.

Someone please correct me if I am completely off here. Thanks.
Last edited by bobbings on Sep 18th, 2020 5:23 pm, edited 1 time in total.
TEAM CANADA!!!!!!!!!!!
Newbie
Sep 29, 2013
39 posts
25 upvotes
bobbings wrote: Correct but the thing about this is that you will have to keep track of that change because the government will just see the purchase price and the selling price. They'll calculate the capital gains from that but if half of the 10 years time you are using it as your principal residence and the other half you rented it out, in theory only the latter half is subject to capital gains. The tricky part is how do you prove the value of your house from 5 years ago and not 10 years ago. 10 years ago, they know what you paid so that's easy to get but 5 years ago, you never sold it but you ended up converting it to a rental property. I had this exact conversation at work a few months ago and one of the guys said you should actually get an official appraisal so you can prove the gains is only really from year 6 to year 10. This is of course assuming the gains from year 6 onwards is more than the total gains from year 1 to 10. You would not want to do this if your purchase price was $1M in year 1 and it dipped from year 1 to 5 down to $700K and then from year 6 to 10, it went back up to $1.3M That means you will have much more gains from year 6 to 10 than years 1 to 10.

Someone please correct me if I am completely off here. Thanks.
Good point. When you set it up as a rental on your taxes you have to set the Adjusted Cost Base of the property to something. That is the number used to calculate your capital gains when you go to sell. Appreciation is definitely not linear.

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