Personal Finance

Convert residence to rental property - Capital Gains tax payable?

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[OP]
Deal Addict
Sep 1, 2003
1610 posts
47 upvotes

Convert residence to rental property - Capital Gains tax payable?

I've lived in my house for just over 5 years. I'm considering moving to another house, and keeping the old one as a rental property.

I understand that under normal circumstances capital gains tax would not be payable on the house if I sold it today because it was my primary residence. But if I did the above scenario and ended up selling the property in another 5 years, would I have to pay tax on the capital gain since the day I bought it, even though I lived in it for half the time?

I am concerned since the property raised in value significantly since the date I purchased it. Appreciate any advice received!
115 replies
Deal Addict
Oct 2, 2005
3191 posts
114 upvotes
Toronto
You can get an appraisal for it when you move out. That would be proof enough to CRA of what your property was worth at the time it converted from residential to income property.
Sr. Member
May 8, 2005
777 posts
4 upvotes
chococrazy wrote: You can get an appraisal for it when you move out. That would be proof enough to CRA of what your property was worth at the time it converted from residential to income property.
You need to start with http://www.cra-arc.gc.ca/E/pub/tp/it120 ... P171_42287 for guidance on a change in use. You'll need the appraisal to set a fair market value for the tax calculations - and you'll want to do that anyway so that you can justify the mortgage for tax deductions. As long as the property is worth more than the mortgage, you're good.
[OP]
Deal Addict
Sep 1, 2003
1610 posts
47 upvotes
Thanks very much for the tips and the link. Very useful.

Any suggestions on where to advertise a rental house?
Deal Addict
Dec 28, 2006
2453 posts
116 upvotes
Saskatoon
pluto wrote: But if I did the above scenario and ended up selling the property in another 5 years, would I have to pay tax on the capital gain since the day I bought it, even though I lived in it for half the time?
No, you would have a taxable cap gain from the time you have the change of use to when you sell. As mentioned, get the property appraised when you convert and that will establish your adjusted cost base for the property.
Jr. Member
Jan 23, 2003
145 posts
2 upvotes
thanks for the info... i m in the same position but is a condo.. do i need the same thing?appraisal? if that is the case.. anyone can recommend one and what is the charge for it ? thanks in advance
Sr. Member
User avatar
May 27, 2007
560 posts
4 upvotes
00wing wrote: thanks for the info... i m in the same position but is a condo.. do i need the same thing?appraisal? if that is the case.. anyone can recommend one and what is the charge for it ? thanks in advance
Yes. Doesn't matter what type of home it is, the law still applies.

As to where you would find a certified appraiser, good question - perhaps your mortgage broker or banker would be able to advise you.
Member
User avatar
Apr 23, 2008
451 posts
Edmonton, Alberta
If you convert a principal residence to a rental property, isn't it a deemed disposition (a non-taxable one, obviously, given that it was his principal residence)? Likewise, if you move into your rental house and make it your principal residence, do you owe taxes on all capital gains up to that point?
Member
Feb 19, 2008
415 posts
4 upvotes
I have a friend who is a tax lawyer who did the following when converting house to a rental property.

He first gifted his 1/2 interest to his wife. Tax free as it was a principal residence.

He then bought the house from his wife. His wife sold it at FMV and had a tax free gain as principal residence. She used proceeds to purchase new principal residence.

He now has a rental property with a new mortgage that CAN be written off as it was secured for an investment property. Apparently the original mortgage and any equity take out for new residence would not apply for tax deductions?

He did the two transactions the day before the new renters moved in.
Deal Fanatic
Feb 1, 2006
9638 posts
883 upvotes
Muskoka
suidmach wrote: You can have 2 primary residences in Canada, so if the rent is under the table, then no capital gains.
You're advocating tax evasion, and with a high possibility of being caught. Just wait till your renter decides to stop paying rent, and threatens to call RevCan on you. Talk about putting yourself in a risky situation!
Deal Addict
User avatar
Aug 1, 2005
1884 posts
159 upvotes
suidmach wrote: You can have 2 primary residences in Canada, so if the rent is under the table, then no capital gains.
You are not able to have two primary residences in Canada. see link
Please point us to the link to support your claim.

In the year of acquisition or disposition it is possible to have two properties that qualify for the PRE, however, this is the exception, not the rule.

I should also mention that it isn't a good idea to hide rental income from CRA. Aside from the ethics, all it takes is one disgruntled tenent to complain and CRA can investigate and slap you with evasion penalties.
[OP]
Deal Addict
Sep 1, 2003
1610 posts
47 upvotes
squid wrote: I have a friend who is a tax lawyer who did the following when converting house to a rental property.

He first gifted his 1/2 interest to his wife. Tax free as it was a principal residence.

He then bought the house from his wife. His wife sold it at FMV and had a tax free gain as principal residence. She used proceeds to purchase new principal residence.

He now has a rental property with a new mortgage that CAN be written off as it was secured for an investment property. Apparently the original mortgage and any equity take out for new residence would not apply for tax deductions?
This is pretty much what my financial advisor described doing except no mention of the gifting it to my wife/buying it back - and I'm not clear on what the benefit of these steps are?

Basically I'd be opening a new mortgage (my house is currently held in a LOC) and using the proceeds to pay off my LOC and any remaining as the downpayment on the new property.

I guess the key is that the new mortgage on the original property should come into effect no earlier than the day after I take possession of my new house so that there is no question of the tax deductability of the interest...
[OP]
Deal Addict
Sep 1, 2003
1610 posts
47 upvotes
I've been crunching the numbers on this and I don't know with my current equity / value of the house(s), cost of borrowing, etc. if doing this will be profitable.

Suppose I was able to get someone to go 50/50 with me on the rental property down payment, and split the proceeds from the rental income. Would we each be able to deduct half of the expenses on the rental property (including the interest on the mortgage) from our personal income taxes?

Or would we have to set up a corporation....? This might be getting way too messy for me....
Sr. Member
May 8, 2005
777 posts
4 upvotes
pluto wrote: I've been crunching the numbers on this and I don't know with my current equity / value of the house(s), cost of borrowing, etc. if doing this will be profitable.

Suppose I was able to get someone to go 50/50 with me on the rental property down payment, and split the proceeds from the rental income. Would we each be able to deduct half of the expenses on the rental property (including the interest on the mortgage) from our personal income taxes?

Or would we have to set up a corporation....? This might be getting way too messy for me....
It's not that messy - all the information (including the percentage of ownership/claim) is reported on the T776 - http://www.cra-arc.gc.ca/E/pbg/tf/t776/t776-07e.pdf. The guide is online at http://www.cra-arc.gc.ca/E/pub/tg/t4036/t4036-e.html and should tell you everything you need to know.
Sr. Member
User avatar
Aug 10, 2005
538 posts
22 upvotes
pluto wrote: This is pretty much what my financial advisor described doing except no mention of the gifting it to my wife/buying it back - and I'm not clear on what the benefit of these steps are?

Basically I'd be opening a new mortgage (my house is currently held in a LOC) and using the proceeds to pay off my LOC and any remaining as the downpayment on the new property.

I guess the key is that the new mortgage on the original property should come into effect no earlier than the day after I take possession of my new house so that there is no question of the tax deductability of the interest...
Most likely, the interest on your mortgage is not tax deductible because the money borrowed was not used to produce income. Your financial advisor may tell you what he believed is right, but it may not be. It's best to consult a tax accountant or a tax lawyer on the issue, a deemed disposition will not turn your mortgage into a deductible mortgage.
Member
Feb 19, 2008
415 posts
4 upvotes
pluto wrote: This is pretty much what my financial advisor described doing except no mention of the gifting it to my wife/buying it back - and I'm not clear on what the benefit of these steps are?

Basically I'd be opening a new mortgage (my house is currently held in a LOC) and using the proceeds to pay off my LOC and any remaining as the downpayment on the new property.

I guess the key is that the new mortgage on the original property should come into effect no earlier than the day after I take possession of my new house so that there is no question of the tax deductability of the interest...
I think the problem is that your equity take back mortgage could be considered a loan to pay off personal debt (LOC) and to buy a personal residence (downpayment), so that it would be denied as a tax deduction against income on the investment property (your only using the income property as collateral for loans for personal nature). You must structure the mortgage as a loan to purchase the investment property. Thus the double transfer in my friend's case.

First to get clear of any title, he gifted it to his wife, and second to buy it for investment reasons from his wife (In BC both of these transfers were property tax free apparently as it was between family and capital gains free as it was disposition of personal residence).

She then used the tax free cash proceeds as down payment on the personal residence (since a loan for personal residence is not tax deductible) and he got the mortgage to specifically buy the income property (now fully tax deductible).
[OP]
Deal Addict
Sep 1, 2003
1610 posts
47 upvotes
squid wrote: I think the problem is that your equity take back mortgage could be considered a loan to pay off personal debt (LOC) and to buy a personal residence (downpayment), so that it would be denied as a tax deduction against income on the investment property.......
That explanation makes a lot of sense, thanks. I assume when you said the transfers were 'property tax free' you possibly meant Land Transfer Tax ? I guess I would could run into a problem then if I enter into a partnership with a non-family member to purchase the rental property after gifting it to my wife.

And thanks Jacklad for the links to the CRA pages/forms that was very helpful and informative.
Member
Feb 19, 2008
415 posts
4 upvotes
pluto wrote: I assume when you said the transfers were 'property tax free' you possibly meant Land Transfer Tax ?

I guess I would could run into a problem then if I enter into a partnership with a non-family member to purchase the rental property after gifting it to my wife.
Yes to first point.

2nd: Maybe not? Perhaps your 1/2 interest would be LTT free, and only the third party would be taxed on their 1/2 interest?

Consult a lawyer for sure.
Deal Addict
Dec 7, 2001
1334 posts
41 upvotes
If you missed out on an appraisal when you move out, can you get the appraisal done in the future.

So, if the OP moved out in 2008 can he still get an appraisal of the place 10 years later for 2008? A historical/past/backdated appraisal?!

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