Real Estate

Changing principal residence to a rental, no capital gain

  • Last Updated:
  • Jun 9th, 2018 1:30 pm
[OP]
Jr. Member
Oct 21, 2017
194 posts
19 upvotes

Changing principal residence to a rental, no capital gain

When you designate your principal residence as a rental for 4 years and you are renting:
-What are the benefits of this aside from no capital gain?
-What are the downsides of this?

"While your election is in effect, you can designate the property as your principal residence for up to four years, even if you do not use your property as your principal residence."
https://www.canada.ca/en/revenue-agency ... perty.html
14 replies
Deal Addict
Jan 1, 2017
1817 posts
1859 upvotes
curiousgeorge1000 wrote: When you designate your principal residence as a rental for 4 years and you are renting:
-What are the benefits of this aside from no capital gain?
-What are the downsides of this?

"While your election is in effect, you can designate the property as your principal residence for up to four years, even if you do not use your property as your principal residence."
https://www.canada.ca/en/revenue-agency ... perty.html
Why would you consider doing this? I see no financial benefit.
[OP]
Jr. Member
Oct 21, 2017
194 posts
19 upvotes
ProductGuy wrote: Why would you consider doing this? I see no financial benefit.
If housing continues to go up in price say for 4 years and you have designated your rental as principal residence for 4 years, there's no capital gain tax. The capital gain tax can be quite a lot.
Penalty Box
Dec 27, 2013
8003 posts
4031 upvotes
Toronto
whats your logic? whats the context?
are you buying another house?
You can only have 1 principal residence designation so you win on one but lose on the other.
Deal Addict
Jan 1, 2017
1817 posts
1859 upvotes
curiousgeorge1000 wrote: If housing continues to go up in price say for 4 years and you have designated your rental as principal residence for 4 years, there's no capital gain tax. The capital gain tax can be quite a lot.
But you will be spending money on rent... so you don’t gain anything by renting out your primary residence and then renting another place for yourself. Might as well continue living there and then sell 4 years later.
Deal Fanatic
Nov 24, 2013
6274 posts
3028 upvotes
Kingston, ON
ProductGuy wrote: But you will be spending money on rent... so you don’t gain anything by renting out your primary residence and then renting another place for yourself. Might as well continue living there and then sell 4 years later.
I believe how most people use this (and why I think they put this election out there) is when you’re moved by work to a different city, province, even country on a 1-4 year basis, but you don’t want to sell the house. You rent it out until you’re going to move back home.

Maybe you change your mind and decide to stay where you moved to, but at least you’ve had that time to think it over without being on the hook for CGT.
Deal Addict
Jan 1, 2017
1817 posts
1859 upvotes
Mike15 wrote: I believe how most people use this (and why I think they put this election out there) is when you’re moved by work to a different city, province, even country on a 1-4 year basis, but you don’t want to sell the house. You rent it out until you’re going to move back home.

Maybe you change your mind and decide to stay where you moved to, but at least you’ve had that time to think it over without being on the hook for CGT.
In this case it makes sense but I don’t think this is what OP meant.
[OP]
Jr. Member
Oct 21, 2017
194 posts
19 upvotes
daivey wrote: whats your logic? whats the context?
are you buying another house?
You can only have 1 principal residence designation so you win on one but lose on the other.
If rent is $1000/month for shared housing and living in your own condo is $2000/month, is it advisable to declare your principal residence as a rental for 4 years to save on capital gain while you are in shared housing?
Deal Addict
Oct 21, 2012
1423 posts
496 upvotes
Toronto
curiousgeorge1000 wrote: If rent is $1000/month for shared housing and living in your own condo is $2000/month, is it advisable to declare your principal residence as a rental for 4 years to save on capital gain while you are in shared housing?
What are you exactly trying to do? If you want to own property which you intend to move back into, it makes sense to make the election. You can't own another principle residence and you can't claim CCA
[OP]
Jr. Member
Oct 21, 2017
194 posts
19 upvotes
joey1234 wrote: What are you exactly trying to do? If you want to own property which you intend to move back into, it makes sense to make the election. You can't own another principle residence and you can't claim CCA
I'm trying to save as much as possible on the new home purchase before moving in in 3-5 years. I only have one home.
Deal Addict
Oct 21, 2012
1423 posts
496 upvotes
Toronto
curiousgeorge1000 wrote: I'm trying to save as much as possible on the new home purchase before moving in in 3-5 years. I only have one home.
So you are assuming the property will be worth more in 3 to 5 years by keeping it I assume?
[OP]
Jr. Member
Oct 21, 2017
194 posts
19 upvotes
joey1234 wrote: So you are assuming the property will be worth more in 3 to 5 years by keeping it I assume?
Yes, I am assuming property will be worth more in 3 - 5 years.
Deal Addict
Oct 21, 2012
1423 posts
496 upvotes
Toronto
curiousgeorge1000 wrote: Yes, I am assuming property will be worth more in 3 - 5 years.
So a negative of doing this has nothing to do with making the election; renting can be a headache and you may incur unexpected problems.

I can't predict the future, but you also could make just as much by selling and sticking the money into a 3YR GIC and have zero hassles with renting out.
Deal Addict
Aug 12, 2004
4506 posts
2166 upvotes
Calgary
You need to think this through a little better...this is not a loophole and has no benefit to you if you are renting yourself (with a big assumption that the market will continue to always go up). This is meant for people to not be penalized by moving for work temporarily but keeping their house.

Downside is you are renting (direct expense with no tax benefit or equity). Realize that capital gain is taxed at 50% of the income rate for your bracket, say you are in a 20% bracket you sell a house purchased for 500K and make a 100K profit after expenses, you pay 10K in taxes. First, your rent needs to be almost non existent for you to benefit (at the cost of your living comfort), and your rental income is also taxed, as income, which is higher than capital gains. And this is all if you actually do get a profit on selling a house, which is not guaranteed in any way.

It's the equivalent of driving 100km across the border to save 5 cents per litre on fuel.
Jr. Member
Apr 28, 2016
101 posts
40 upvotes
You are on the right track, I recently went through the same process. Principal home tax exemption is the one of best ways to shelter your property gains from CRA. This is your only property so it should be a no brainier.

Whether you want to rent it out for 4 years or stay there yourself is another story, but keep the property as your principal.

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