Real Estate

Tax on sale of a rented house?

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Newbie
Jan 11, 2008
13 posts

Tax on sale of a rented house?

I am confused with capital gain tax in Canada. Maybe someone can help me. I have a house and we lived in that house for 10 years. I bought another house 7 years ago. moved and rented the old house. The old house was mostly rented for the last 7 years. Now I would like to sell that house? How much capital gain tax am I going to pay for that sale if any? Thanks
20 replies
Deal Fanatic
May 31, 2007
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mtiqbal wrote: I am confused with capital gain tax in Canada. Maybe someone can help me. I have a house and we lived in that house for 10 years. I bought another house 7 years ago. moved and rented the old house. The old house was mostly rented for the last 7 years. Now I would like to sell that house? How much capital gain tax am I going to pay for that sale if any? Thanks
Cost price is fair market value the day you switch principal residence. Since you are only allowed principal residence exemption for one property at one time.

When you sell, subtract your cost to liquidate. Usually realtor and lawyer fees. That's your net sale price.

50% of Whatever you "gained" between your fair market cost and net sale date is taxed at your marginal tax rate.

Cra is doing massive audits on this stuff FYI so make sure you have a paper trail just in case.
Deal Addict
Nov 2, 2005
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WFH
You should really have got it professionally appraised 7 years ago when you started renting it out. Maybe it's time to talk to an accountant to figure out how you retroactively establish the fair market value from 7 years ago. At the same time you should get him to review how you've been reporting the rental income/expenses over that period.
Newbie
Dec 13, 2010
2 posts
Toronto
I have a similar question. What if you sell the home for less than you bought it? Could you claim a capital loss?
Deal Fanatic
May 31, 2007
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dirtmover wrote: You should really have got it professionally appraised 7 years ago when you started renting it out. Maybe it's time to talk to an accountant to figure out how you retroactively establish the fair market value from 7 years ago. At the same time you should get him to review how you've been reporting the rental income/expenses over that period.
You can get a realtor to print three comparable sales from 7 years ago, that would be sufficient for CRA>
Deal Fanatic
May 31, 2007
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bmattyb wrote: I have a similar question. What if you sell the home for less than you bought it? Could you claim a capital loss?
Yes you can have a capital loss- so long as it's not your primary residence.

Capital losses can be used to lower or eliminate any capital gains that year, or carried and saved for anytime in the future, when you might have some capital gains.
Or, capital loss can be carried backward up to 3 years.
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Nov 2, 2013
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Jungle wrote: You can get a realtor to print three comparable sales from 7 years ago, that would be sufficient for CRA>
Sometimes based on that, depending on property, they will use a $x/sq ft. comparison metric with similar properties.
For condos it's more complicated since more factors are involved, such as unit positioning within the building, views, layout, direction the unit faces (N, S, E, W?), ambient lighting, history of special assessments/board management, etc... Best to get a professional appraisal at the time.

I have a similar issue as 2017 is the 1st year I've used my rental for partial business use and partial rental, but it was purchased in 2016. Do not want to use the 2016 purchase price, as the value would have risen by 2017, and I did not claim CCA and hence never gave CRA a dollar value in 2016.
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Deal Fanatic
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Dec 27, 2009
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It doesn't matter what the house was worth 7 years ago. There is a form for calculating the Capital Gain. Form T2091.
Sr. Member
Jun 19, 2017
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Chickinvic wrote: It doesn't matter what the house was worth 7 years ago. There is a form for calculating the Capital Gain. Form T2091.
I'm pretty sure the fair market value of what the house was worth 7 years ago matters for calculating capital gains.
Sr. Member
Jun 19, 2017
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I believe you will need to determine the fair value of your home 7 years ago to calculate the capital gains.

As I understand it, realtors can provide a "market assessment" value of the home, But I don't believe the CRA has to accept that value. I think you need to have a formal Appraisal institute of Canada designated appraisal done, otherwise you take your chances.
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Dec 27, 2009
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Qrewpt wrote: I'm pretty sure the fair market value of what the house was worth 7 years ago matters for calculating capital gains.
No, it doesn't. You take what you originally paid for the house (plus whatever capital improvements, etc) and use your selling price (minus selling expenses). You take the total number of years owned and you take total number of years it was your designated principal residence (plus 1). Divide to get your formula. It is all laid out pretty clearly on the form I referenced.
Deal Fanatic
May 31, 2007
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Chickinvic wrote: No, it doesn't. You take what you originally paid for the house (plus whatever capital improvements, etc) and use your selling price (minus selling expenses). You take the total number of years owned and you take total number of years it was your designated principal residence (plus 1). Divide to get your formula. It is all laid out pretty clearly on the form I referenced.
From the GOV of Canada website:

"If the property was your principal residence for any year you owned it before you changed its use, you do not have to pay tax on any gain that relates to those years. You only have to report the gain that relates to the years your home was not your principal residence."

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

It's called a "change in use", and makes an artificial "cost price" for the purpose of capital gains when you switch from principal residence to rental property:

"Every time you change the use of a property, you are considered to have sold the property at its fair market value and to have immediately reacquired the property for the same amount. "
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Dec 27, 2009
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Jungle wrote: From the GOV of Canada website:

"If the property was your principal residence for any year you owned it before you changed its use, you do not have to pay tax on any gain that relates to those years. You only have to report the gain that relates to the years your home was not your principal residence."

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

It's called a "change in use", and makes an artificial "cost price" for the purpose of capital gains when you switch from principal residence to rental property:

"Every time you change the use of a property, you are considered to have sold the property at its fair market value and to have immediately reacquired the property for the same amount. "
From Govt of Canada website:

If your home was not your principal residence for every year that you owned it, you have to report the part of the capital gain on the property that relates to the years for which you did not designate the property as your principal residence. To do this, complete Form T2091(IND), Designation of a Property as a Principal Residence by an Individual (Other Than a Personal Trust). You are also required to complete the applicable sections of Schedule 3 as indicated on page 2 of the schedule. If you are the legal representative for a deceased person, you can designate a property using Form T1255, Designation of a Property as a Principal Residence by the Legal Representative of a Deceased Individual.


*Form T2091 (IND) does the calculation as I described.
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Jul 3, 2011
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Chickinvic is correct. FMV won't need an appraisal if the property was purchased at arms length as this meets the definition of FMV - an open market with a wiling buyer and a willing seller. The FMV calculation would then just become the adjusted cost base and the cap gain would be prorated for the number of years it was income producing.

An appraisal is recommended when a deemed disposition takes place for a value that was not at FMV (e.g non arms-length, tax auction) or where the fmv is uncertain.
Jungle wrote: From the GOV of Canada website:

"If the property was your principal residence for any year you owned it before you changed its use, you do not have to pay tax on any gain that relates to those years. You only have to report the gain that relates to the years your home was not your principal residence."

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

It's called a "change in use", and makes an artificial "cost price" for the purpose of capital gains when you switch from principal residence to rental property:

"Every time you change the use of a property, you are considered to have sold the property at its fair market value and to have immediately reacquired the property for the same amount. "
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May 31, 2007
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licenced wrote: Chickinvic is correct. FMV won't need an appraisal if the property was purchased at arms length as this meets the definition of FMV - an open market with a wiling buyer and a willing seller. The FMV calculation would then just become the adjusted cost base and the cap gain would be prorated for the number of years it was income producing.

An appraisal is recommended when a deemed disposition takes place for a value that was not at FMV (e.g non arms-length, tax auction) or where the fmv is uncertain.
Interesting, didn't know. Thanks for sharing!
Deal Guru
Feb 22, 2011
10182 posts
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Toronto
licenced wrote: Chickinvic is correct. FMV won't need an appraisal if the property was purchased at arms length as this meets the definition of FMV - an open market with a wiling buyer and a willing seller. The FMV calculation would then just become the adjusted cost base and the cap gain would be prorated for the number of years it was income producing.

An appraisal is recommended when a deemed disposition takes place for a value that was not at FMV (e.g non arms-length, tax auction) or where the fmv is uncertain.
I didn't know this either. So if I lived in a condo I am selling for 2 years and rented it out for 3 but all the gain is in the last 2 years I'll still only be taxed on half of 3/5 of it?
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rjg4235 wrote: I didn't know this either. So if I lived in a condo I am selling for 2 years and rented it out for 3 but all the gain is in the last 2 years I'll still only be taxed on half of 3/5 of it?
2/5 (they give you a freebie year). For primary residence it is all the tax years it was your primary residence and you get to add 1.
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Jul 3, 2011
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rjg4235 wrote: I didn't know this either. So if I lived in a condo I am selling for 2 years and rented it out for 3 but all the gain is in the last 2 years I'll still only be taxed on half of 3/5 of it?
The reporting mentioned would apply before the 2016 change in use reporting requirement and the introduction of T2091. Beginning with the filing of 2016's tax return the change in use rule became a requirement and would need a FMV as the disposition/re-acquisition.

I wouldn't advise anyone to not report their change in use on T2091 as there's no guarantee they'll get away with the pro-rata calculation. Best to consult an accountant.
Deal Addict
Jun 11, 2005
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I do not understand why people like the OP come to RFD for complicated tax advice when perhaps many dollars are at stake. The only people that give sound tax advice on RFD are Dutchca and Gardener/OttawaGardener IIRC.

Anyhow, it is definitely NOT what chickinvic described, being 10/17 of the overall gain being exempt, unless the first 10 years of ownership coincidentally accounted for 10/17 of the overall gain and 7/17 of the overall gain coincidentally occurred since 7 years ago. The straightline proration suggested by Chickinvic works only when there is this type of coincidence or when there is no change in use (i.e., a cottage for which you are not designating as PR every year but still remains a personal use property).

Here, there was a change in use. So absent a special election under 45(2), there should have been a deemed disposition 7 years ago at FMV at that time. However, this would have been a "non-event" if that qualified as a PR for those 10 years (9 years + the 1 freebie year, or otherwise).

Then, the appreciation since the FMV as at seven years ago (again absent a special election) should be taxable as a capital gain as 1/2.

The 45(2) election is a bit too detailed to outline but if you Google it and find a good write-up, you will find some good info on it. It allows you to claim up to another four years of PR on the property sold but those years designated for PRE will not be available for PRE designation for the principal residence.
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Jul 3, 2011
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mudd_stuffin wrote: I do not understand why people like the OP come to RFD for complicated tax advice when perhaps many dollars are at stake. The only people that give sound tax advice on RFD are Dutchca and Gardener/OttawaGardener IIRC.

Anyhow, it is definitely NOT what chickinvic described,...

The straightline proration suggested by Chickinvic works only when there is this type of coincidence or when there is no change in use (i.e., a cottage for which you are not designating as PR every year but still remains a personal use property).

The 45(2) election is a bit too detailed to outline but if you Google it and find a good write-up, you will find some good info on it. It allows you to claim up to another four years of PR on the property sold but those years designated for PRE will not be available for PRE designation for the principal residence.
Your own reference to the cottage change in use supports Chickinvic's position and It's always better to go directly to the source especially because it is detailed it makes it easier to understand:

The 4 year rule applies only if the income was reported and there was not CCA taken meaning we have no idea if it applies to the OP and should not have been mentioned without noting those two exceptions.

Direct from the tax code. This describes the OP's remarks and is in line with Chickinvic and it is why the form T2091 has the pro-rata calculation. It's not there to be meaningless
2.19 The taxpayer’s gain otherwise determined means the amount that the gain (if any) from the taxpayer's disposition (or deemed disposition) of the property would be – before the two reductions described in ¶2.20 - 2.26 – if the capital gains election provision in subsection 110.6(19) and the related provision in subsection 110.6(21) were not taken into account. Thus, if a subsection 110.6(19) capital gains election has been made in respect of the property, the taxpayer’s gain otherwise determined is calculated without reference to the deemed disposition and reacquisition of the property under that election. That is, the gain otherwise determined is calculated without taking into account the increase to the adjusted cost base of the property under subsection 110.6(19) or the decrease to that adjusted cost base under subsection 110.6(21).

2.20 The first amount by which the taxpayer’s gain otherwise determined is reduced under paragraph 40(2)(b) is calculated by using the following formula:

A × (B ÷ C)

The variables in the above formula are as follows:

A is the taxpayer’s gain otherwise determined, as described above.

B is 1 + the number of tax years ending after the acquisition date for which the property was the taxpayer’s principal residence and during which he or she was resident in Canada. (Note that both these conditions must be satisfied for a particular year in order for that year to qualify for inclusion in variable B.)

C is the number of tax years ending after the acquisition date during which the taxpayer owned the property (whether jointly with another person or otherwise – see ¶2.9).
2.25 The taxpayer calculates the capital gains election reduction amount on Form T2091(IND)-WS, Principal Residence Worksheet, which the taxpayer files with the T2091(IND) designation form (see ¶2.15 - 2.16).

2.26 The remaining discussions in this Chapter regarding paragraph 40(2)(b) are concerned with the first reduction to the gain otherwise determined, that is, the reduction provided for by means of the above-mentioned formula, A × (B ÷ C) . Unless stated to the contrary, it is assumed for purposes of those discussions that the taxpayer did not make a capital gains election and thus that there is no second reduction to the gain otherwise determined, that is, no capital gains election reduction amount.
https://www.canada.ca/en/revenue-agency ... tml#N103EF

see also http://laws-lois.justice.gc.ca/eng/acts ... ge-30.html

I do agree..always seek professional help the paid for kind comes with fiduciary duty and so is always better.

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