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The Little Known 4 Year Extension on Principal Residence Exemption After You Move Out!

capital-gains1-736x1024Congratulations to my brother in law, Tony, who has recently become a real estate investor. He’s in the process of turning his principal residence into a rental property and planning to rent afterwards.

Most real estate investors are aware that we do not need to pay tax on the capital gain incurred on our principal residence. But what happens if you move out from your current residence and turn it into a rental property?

In the eyes of the Income Tax Act, you have disposed your home at fair market value at the time. Because you have been living at the house, you can designate the house as your principal residence and thus shelter all the capital gain you have made.

Of course, you need to get some support for the fair market value of the property. An independent appraisal is often advised, and it should be done at the time of the change of use.

Now, back to Tony, since he is renting his next home, few people know that Income Tax Act actually allows him to continue to designate this property as principal residence for four more years, provided that he does not designate any other properties for the same period.

So say Tony purchased the property for $300,000 in 2008. The property is now worth $500,000 in 2015. A deemed disposition would have occurred for him in 2015 sheltering the $200,000 as part of the principal residence exemption.

Keeping our fingers crossed, this property will be worth $650,000 in 2019. With this election, he can shelter another $150,000 capital gain!

An election has to be filed at the same time with Canada Revenue Agency. Consult a Real Estate Accounting Professional before filing your tax return.

During this four-year extension, Tony cannot claim capital cost allowance on the building to offset the rental income he earns on this property.

In addition to this election, Canada Revenue Agency even allows a taxpayer to extends the principal residence exemption indefinitely if the following conditions are met:

  • The taxpayer lives away from the principal residence because his employer would want him to relocate
  • The taxpayer and the employer are unrelated
  • The taxpayer returns to the original home after the employment is terminated
  • And the temporary residence is at least 40km away from the original home

Until next time, happy real estate investing!

 

Cherry Chan, CPA, CA

Your real estate accountant

 

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.
6 replies
  1. Ashley
    Ashley says:

    Cherry,

    What if you have claimed 1 year of taxes before knowing if this exemption process?

    Can you re-nag your filed taxes? Can it apply this year even if you filed last year?

    Thank you,
    Ashley

    Reply
  2. Paula
    Paula says:

    Cherry,

    Great article and may I say, I love all your other articles, it’s so informative! I am kind of in this situation and will be my first investment property.

    What if after the four years, I decide to continue to leave it as a rental property? What would be tax implications? And how would that affect me?

    Your advice would be greatly appreciated.

    Thank you,
    Paula

    Reply
  3. Athena
    Athena says:

    What happens if I own my house and rent out my basement. I live on top floor. Is there a change of use? I don’t take CCA on my tax return. Thank you.

    Reply

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