Capital gain on rental house

ZhaoW9051 wrote: ↑ Hi folks,

I would like to know how CRA calculate capital gain. I am moving to a new house and converting my current primary residential house in to a rental unit. If I plan to sell this rental unit in a few years , how cra determine the capital gain?

Do you not know how to Google?

https://www.canada.ca/en/revenue-agency ... -loss.html

If you're looking for someone to dumb it down for you then talk to an accountant.

Change in use = deemed disposition.
Your gain up to the date of change in use would be exempt from tax assuming it's your principal residence. Use some market report to get the fair market value.

Then, any gain from the date of change in use would be subject to capital gain tax.

I think some tax elections or tax plannings are available. Too complicated to explain on the forum and it depends on your situation. Speak to a professional if you are interested.
For most ppl, i don't think it's worthwhile.

ZhaoW9051 wrote: ↑ Hi folks,

I would like to know how CRA calculate capital gain. I am moving to a new house and converting my current primary residential house in to a rental unit. If I plan to sell this rental unit in a few years , how cra determine the capital gain?

It can be very easy, you normally pay tax on 50% of the gain which is added to your income and taxed at that rate.

However, if it was a primary residence for part of the time it is proportional. So if you owned it 10 years and it was a primary residence for 6 years you would only pay tax on 60% of 50% of the gain.

Speak to a trusted professional. When you sell a rental, you have to plan this out far in advance to lessen that tax hit....provided your property has gone up significantly in value while it was a rental.

Can somebody chime in. I've been told that if you move back into your rental property and register it as your primary residence, live there for 2 years and then sell it, you can sell the house without paying capital gains tax? Is this true, or a just myth among my friends (area is Toronto).

clydelee2020 wrote: ↑ Can somebody chime in. I've been told that if you move back into your rental property and register it as your primary residence, live there for 2 years and then sell it, you can sell the house without paying capital gains tax? Is this true, or a just myth among my friends (area is Toronto).

This is not true, you would have to pay capital gains tax proportional to the time it was a rental.

For instance if you owned it 10 years and only lived there 2 you would pay 80% of 50% of the gain.

sircheersa wrote: ↑ It can be very easy, you normally pay tax on 50% of the gain which is added to your income and taxed at that rate.

However, if it was a primary residence for part of the time it is proportional. So if you owned it 10 years and it was a primary residence for 6 years you would only pay tax on 60% of 50% of the gain.

You mean 40% of the gain.

board123 wrote: ↑ You mean 40% of the gain.

Yes you are right 40% of 50% of the gain.

sircheersa wrote: ↑ This is not true, you would have to pay capital gains tax proportional to the time it was a rental.

For instance if you owned it 10 years and only lived there 2 you would pay 80% of 50% of the gain.

Sheeet. This makes a lot of sense thanks.

It's not the default rule; i think there's an election to achieve that. if you need to make an election, it's best if you speak to a professional.

sircheersa wrote: ↑ This is not true, you would have to pay capital gains tax proportional to the time it was a rental.

For instance if you owned it 10 years and only lived there 2 you would pay 80% of 50% of the gain.

What I did was get an appraisal done on the house when I converted it to a rental. Use that value to report a deemed disposition on the tax return for that year. This is the proper way to do it although you can do the "linear" way down the road once you sell. Considering the crazy gains we've seen recently though it may be in your interests to get an appraisal done now rather than do it "linearly".

clydelee2020 wrote: ↑ Can somebody chime in. I've been told that if you move back into your rental property and register it as your primary residence, live there for 2 years and then sell it, you can sell the house without paying capital gains tax? Is this true, or a just myth among my friends (area is Toronto).

I have no idea what your friends are referring to. However, and this is ONLY if you do not claim any other property as principal residence, yes you can avoid paying capital gains if it is a rental for up to 4 years. See this page and the CRA pages that it links to: https://kozirealty.com/principal-reside ... -452-and-3

You may want to hire an accountant to make sure this is done properly though.

clydelee2020 wrote: ↑ Can somebody chime in. I've been told that if you move back into your rental property and register it as your primary residence, live there for 2 years and then sell it, you can sell the house without paying capital gains tax? Is this true, or a just myth among my friends (area is Toronto).

I could see the logic and strategy in how the taxman could easily overlook past details and assume you lived there all along......

it could work.....

SomeOtherDude wrote: ↑ I could see the logic and strategy in how the taxman could easily overlook past details and assume you lived there all along......

it could work.....

Well, depends where you were living during those two years...if you bought another house you obviously can't claim two principal residences, that would be extremely obvious to CRA.

If you were renting yourself or living out of the country, then it is perfectly legal to avoid capital gains taxes (as per my post above).

If you are intending to claim the rental as your primary residence and not the other house you bought...well, either way you will be paying capital gains on one of those properties so CRA will still be getting some tax from you, and you may end up paying more tax if your other property appreciated more. Plus again CRA will easily be able to tell because you have to report rental income at that address. I mean, I guess if you are planning to commit tax fraud might as well go all the way... But you would be digging yourself a deeper hole if you don't report rental income or attribute rent to the wrong address. If your tenants request a rental receipt, uh-oh. Anyways, it won't be a fun time if you get audited, that's for sure! :P

How do I get CRA to know the fair market value when there is a change of use? In my case, the house I am currently owning has always been my primary residence. It has appreciated significant over the last 2 years. Before converting to rental, I hope to have highest market value so that in a.few years when I sell.my house, the capital gain is the sale price minus the appraised price today, am I right?

ZhaoW9051 wrote: ↑ How do I get CRA to know the fair market value when there is a change of use? In my case, the house I am currently owning has always been my primary residence. It has appreciated significant over the last 2 years. Before converting to rental, I hope to have highest market value so that in a.few years when I sell.my house, the capital gain is the sale price minus the appraised price today, am I right?

You need to report the change of use in the tax year it occurred (Schedule 3 & T2091 Form). There you will report the FMV for the date the change in use occurred in respect of your former principal residence. That sets the cost base for the new rental property going forward. And yes you would want the highest FMV when changing use to rental. Within reason of course to avoid CRA challenging your FMV.

ZhaoW9051 wrote: ↑ How do I get CRA to know the fair market value when there is a change of use? In my case, the house I am currently owning has always been my primary residence. It has appreciated significant over the last 2 years. Before converting to rental, I hope to have highest market value so that in a.few years when I sell.my house, the capital gain is the sale price minus the appraised price today, am I right?

Yes, you want the highest value possible.

I got an official appraisal done by a house appraiser for this purpose. You just want to make sure you can provide proof for the value you enter on your tax return if CRA audits you.