Real Estate

Help - Any way to reduce Capital Gains on only Property (not lived in)

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  • Jul 31st, 2019 11:02 am
[OP]
Newbie
Sep 22, 2013
1 posts
Toronto

Help - Any way to reduce Capital Gains on only Property (not lived in)

Hi Folks,

Needed some help - super confused about what actions I need to take to minimize any taxes I need to pay. So here's the story:

1. Bought a condo in 2017 (first one I ever purchased when I got married, 350k, downpayment was 10k, currently owe 320k on it. Fixed 5-year term at 3.4%) in Mississauga

2. Right when the deal for buying was going on, I got a promotion and moved to my company's head office in Montreal. My wife and I thought it'd be good to keep condo in Mississauga and rent it out (either some day we'll move back, or we'll take advantage of price gain) - so we kept proceeding with the deal

3. Now seems like Montreal is working out for me in my company, and chances are I stay here for another few years and then go abroad with my company (which I prefer)

4. Managing the property from 6 hours away has been a pain (doing everything over tht phone, etc). My real estate agent who sits on the board of the building has been helping out greatly (they get the tenants, etc). In essence, stress is creeping up on the property

5. The maintenance fees and taxes have gone up - paying 600 a month just on these two things. With the rent and mortgage payment I'm basically coming up -50 to -100 each month. I don't see the rental value going up beyond (1bed/1bath and getting 2100).

6. Im currently renting in downtown Montreal and really want to buy something here so family can sort of call the place our home. However recently have not had any disposable cash due to a few other reasons.

7. My wife doesn't work so no income (she tried some work last year but didn't like it). We manage well with one income.

The question: I want to sell the condo in Mississauga (that decision has been taken so not looking back at that), but was doing rough math and it looks like with current prices assuming I make 120k on it, I'll basically only be netting 60k (35k to bank for mortgage term cancellation, and real estate lawyer etc, and another 25k on capital gains). The bank/re/lawyer fees I can't do much about, but what about the capital gains? Are there any ways to minimize it? 60k won't leave me much for downpayment on a property in Montreal (since it'll be my second purchase I won't qualify for the first time buyer incentives the govt just came up with).

I plan on selling next spring so still have a few months to plan out what I can do (if anything at all).
15 replies
Deal Addict
Jun 13, 2009
1007 posts
254 upvotes
Talk to an accountant for proper advice. I believe the mortgage penalty is tax deductible. If you did any renos/repairs, you can claim that as well which may be useful to increase property value.

It's better to sell in Spring if you can hold off until next year. Also if you have tenants, you need to give them notice.
Member
Jul 4, 2018
307 posts
205 upvotes
1. Mortgage penalty can be waived off by bank if you buy/close another property in 90 days from the sell/close of your Mississauga condo.
2. But if your mortgage is not with A lender, there is very limited flexibility in doing these buy/sell transactions.
3. Realtor fee typically will be 3.5% plus HST
4. Capital gains are mandatory if you don’t live in the property, but not sure if accountants have any other ideas or exceptions if you have only one property.
5. It is better to take HELOC on this condo and buy primary property in Montreal, instead of selling it as it yields good rent and good potential to grow.

My $0.02
Newbie
May 7, 2010
24 posts
7 upvotes
Solely with respect to capital gain portion, depending on how long you lived in your condo originally, you may be able to claim it as primary residence for up to four [4] years without living in it.
Broker, MBA, CFA, CPA
Homelife Landmark Realty
Deal Addict
Aug 12, 2004
4459 posts
2111 upvotes
Calgary
dvd_920 wrote: Solely with respect to capital gain portion, depending on how long you lived in your condo originally, you may be able to claim it as primary residence for up to four [4] years without living in it.
It doesn't sound like they ever lived in it.

OP in regards to the term penalty, 35K is quite a heavy fee to lose out on simply on your mortgage. That alone should tell you it's not a wise idea to sell at this time. That's 35K that can be in your pocket. Are you on a 5 year or 10 year term? If 5 year it would be wise to hold on the property until you only have lowered the penalty significantly. The IRD penalty was the main reason we did not sell our condo and rented it instead.

Are you cashflow negative, or actually negative when renting? Being cashflow negative (where you have to put money out of pocket in every month but still getting amounts paid to equity) is fine to do.

Capital gains is capital gains, but not sure how you are calculating you will lose 25K. You account for the cost of selling including the term penalty making you go down to 85K ish, capital gains is 50% taxable of that gain, and that's at your highest tax bracket. You are likely more in the 9-12K range.

Capital gains is the least of your worries, you need to get that penalty down.
Deal Guru
Feb 29, 2008
12683 posts
7915 upvotes
dvd_920 wrote: Solely with respect to capital gain portion, depending on how long you lived in your condo originally, you may be able to claim it as primary residence for up to four [4] years without living in it.
How?
Sr. Member
Feb 19, 2019
857 posts
936 upvotes
Stouffville ON
JayLove06 wrote: How?
Here is the explanation.
https://www.canada.ca/en/revenue-agency ... perty.html

In specific circumstances you can make the election indefinitely. I am not sure if how long one has lived in the condo is a determining factor, if I am not mistaken if the intent of the purchase was as a principal residence it doesn't matter how long one has lived there, if one purchased precon and the circumstances have changed prior to occupancy I believe the election can be made without even one day living in the property.
Full Time and Full Service Realtor
Deal Addict
Aug 30, 2011
3459 posts
1217 upvotes
Ottawa
senasena wrote: Here is the explanation.
https://www.canada.ca/en/revenue-agency ... perty.html

In specific circumstances you can make the election indefinitely. I am not sure if how long one has lived in the condo is a determining factor, if I am not mistaken if the intent of the purchase was as a principal residence it doesn't matter how long one has lived there, if one purchased precon and the circumstances have changed prior to occupancy I believe the election can be made without even one day living in the property.
OP does not qualify. He must have lived there, as his principal residence. He never lived there. Please read the requirements before posting an erroneous opinion, thanks.
Sr. Member
Feb 19, 2019
857 posts
936 upvotes
Stouffville ON
OttawaGardener wrote: OP does not qualify. He must have lived there, as his principal residence. He never lived there. Please read the requirements before posting an erroneous opinion, thanks.
The link I have posted lists the requirements and it doesn't mention anything about living there for any length of time. If you could post a source document indicating the requirement for election 45(2) I would be happy to stand corrected.
Full Time and Full Service Realtor
Banned
Sep 19, 2012
1253 posts
1865 upvotes
Calgary
senasena wrote: The link I have posted lists the requirements and it doesn't mention anything about living there for any length of time. If you could post a source document indicating the requirement for election 45(2) I would be happy to stand corrected.
Problem is that to avail yourself of the relief in 45(2) you need to have met the provisions in 40(2)(b) - otherwise known as the principal residence exemption. One of the conditions of making a property your principal residence is that you have to “ordinarily inhabit”. I think that’s what @OttawaGardener is getting at.

Unless OP could argue that this was their principal residence (probably only possible in the year they bought and moved to Montreal) then they cannot use 45(2) because there was never a “change in use”. The property was always income producing.
Nikola Alaica, CPA, CA | Tax, Accounting, Mortgages
Deal Addict
User avatar
Dec 13, 2016
3582 posts
3072 upvotes
ShawezB997 wrote:
7. My wife doesn't work so no income (she tried some work last year but didn't like it). We manage well with one income.
Wow..... just wow
Jr. Member
Oct 27, 2018
123 posts
52 upvotes
Is the property all in your name at the time of purchase? Is your wife on the title?
Deal Addict
Aug 30, 2011
3459 posts
1217 upvotes
Ottawa
senasena wrote: The link I have posted lists the requirements and it doesn't mention anything about living there for any length of time. If you could post a source document indicating the requirement for election 45(2) I would be happy to stand corrected.
The title and first lines of the page you linked to are pretty clear.
Changing all your principal residence to a rental or business property
When you change your principal residence to an income producing use such as a rental or business property, you can make an election not to be considered as having started to use your principal residence as a rental or business property.

A pincipal residence is explained on the CRA website - it is assumed that people would understand (or learn) what a principal residence is before reading the remaining conditions.

I would ask that you research your answers if you're not sure of them, as it can be confusing for others to see contradictory responses. Thanks ☺
Sr. Member
Feb 19, 2019
857 posts
936 upvotes
Stouffville ON
ahlaker wrote: Problem is that to avail yourself of the relief in 45(2) you need to have met the provisions in 40(2)(b) - otherwise known as the principal residence exemption. One of the conditions of making a property your principal residence is that you have to “ordinarily inhabit”. I think that’s what @OttawaGardener is getting at.

Unless OP could argue that this was their principal residence (probably only possible in the year they bought and moved to Montreal) then they cannot use 45(2) because there was never a “change in use”. The property was always income producing.
The below clarifies my understanding, and I also clarify what I should have said.
https://www.canada.ca/en/revenue-agency ... dence.html

CRA explains the situation in paragraph 2.56 which I copy below:

2.56 Similar to the treatment for a subsection 45(2) election (see ¶2.50 to 2.51), a property can qualify as a taxpayer’s principal residence for up to four tax years prior to a change in use covered by a subsection 45(3) election, in lieu of fulfilling the ordinarily inhabited rule (discussed in ¶2.10 to 2.12) for these years. As in the case of a subsection 45(2) election, residence or deemed residence in Canada during these years is necessary for the full benefit of the principal residence exemption to apply. Furthermore, the rule described in ¶2.13 to 2.14 prevents the designation of more than one property as a principal residence for any particular year by the taxpayer (or, for any particular year after the 1981 tax year, by the taxpayer or any other member of his or her family unit).
Example 5
Mr. X bought a house in 2003 and rented it to a third party until mid-2009. Mr. X and his family then lived in the house until it was sold in 2011. Mr. X has been resident in Canada at all times. When he filed his 2011 income tax return, Mr. X designated the house as his principal residence for the 2009 to 2011 tax years inclusive, by virtue of his having ordinarily inhabited it during those years. He also designated the house as his principal residence for the 2005 to 2008 years inclusive (that is, the maximum 4 years) by virtue of a subsection 45(3) election, which he filed with his 2011 income tax return (he was able to make this designation because (i) no other property had been designated by him or a member of his family unit for those years, and (ii) he did not claim any CCA when reporting the net income from the property before the change in use). However, his gain otherwise determined on the disposition of the house in 2011 could not be fully eliminated by the principal residence exemption formula because he could not designate the house as his principal residence for the 2003 and 2004 years.


It seems pretty clear to me that the taxpayer purchased the property and never lived in it until few years in the future, and per cra is able to claim the election.

I have made couple of errors in my post, first should have mentioned election 45(3) instead of 45(2), secondly I said one never has to live in the property which is incorrect, should have said doesn’t have to live in the property from the day of purchase, but does have to live in the property at some time in the future.
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