Congratulations 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.