Converting existing home to rental property and buying a new one
Results 1 to 7 of 7

Thread: Converting existing home to rental property and buying a new one

  1. #1
    Junior Member
    Join Date
    Jan 2017
    Posts
    1

    Exclamation Converting existing home to rental property and buying a new one

    Hi All,


    We still haven't filed our taxes for 2015.

    We rented the property we were living in so converted it to a rental property and bought another one and moved there. So til September 2015, our principal residence was property #1, then we moved to property #2, so principal residence is that one.

    Do we have to do anything separately for taxes to show that the principal residence became rental property? Any election for section 45(2)?


  2. #2
    Senior Member
    Join Date
    Mar 2012
    Posts
    3,103
    You should register the value of the property with CRA for capital gains reasons going forward. You usually need something official like an appraisal to cover your butt properly.
    I'm not JustAGuy (without spaces), or Donald, or <insert name here>.

  3. #3
    Senior Member
    Join Date
    Mar 2016
    Posts
    104
    conversion of use of primary residence to a rental property does trigger a deemed disposition (meaning you will would have technically disposed of the asset at its FMV) and will have to report capital gains on the deemed disposition, however, if this property was your principal residence for the entire time you are will get the principal residence exemption which can eliminate your tax liability.

    Best thing to do - file with CRA ASAP to let them know to minimize tax liability of CG, get appraisal done.

    Note that you will now technically have acquired the rental property at FMV and can now claim CCA on that amount and deduct that against the rental income generated.

  4. #4
    Senior Member
    Join Date
    Dec 2013
    Location
    Winnipeg
    Posts
    779
    Quote Originally Posted by redsgomarching View Post
    conversion of use of primary residence to a rental property does trigger a deemed disposition (meaning you will would have technically disposed of the asset at its FMV) and will have to report capital gains on the deemed disposition, however, if this property was your principal residence for the entire time you are will get the principal residence exemption which can eliminate your tax liability.
    I second this.

    Quote Originally Posted by redsgomarching View Post
    Note that you will now technically have acquired the rental property at FMV and can now claim CCA on that amount and deduct that against the rental income generated.
    I wouldn't do this though. Claiming CCA on something that is not really depreciating is going to come back and bite you later when you have CCA recapture on sale. You will need to take it into income all in one year and it could send you into the top tax bracket. It should also be noted you can only claim CCA to the extent it doesn't cause a loss on rental property. The CRA doesn't want taxpayers taking a loss on a rental and applying it against other sources of income.
    Last edited by CPA Candidate; 2017-01-04 at 04:39 PM.

  5. #5
    Senior Member
    Join Date
    Oct 2010
    Posts
    7,040
    Quote Originally Posted by iloveRe View Post
    .... We still haven't filed our taxes for 2015.
    Probably not a good thing to be behind the times.


    Quote Originally Posted by iloveRe View Post
    ... We rented the property we were living in so converted it to a rental property and bought another one and moved there. So til September 2015, our principal residence was property #1, then we moved to property #2, so principal residence is that one.
    Was an appraisal done around the time of the conversion?

    If not, the time delay may make for a variation in what the FMV for Sept 2015 is and/or may open up the question of how accurate a post-dated appraisal is.


    Quote Originally Posted by iloveRe View Post
    ... Do we have to do anything separately for taxes to show that the principal residence became rental property? Any election for section 45(2)?
    Question is ... does it qualify to make this election?

    If the s. 45(2) election was not made when the change in use occurred, CRA might accept a late election under certain circumstances, one of which is that no capital cost allowance has been claimed on the property since the change in use occurred and during the period in which the election is to remain in force.
    http://www.taxtips.ca/personaltax/pr...hangeinuse.htm

    The other issue is that it seems a prerequisite to making this election is not having a principal resident anywhere else.
    When you change your principal residence to 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 ...
    However, you can only do this if you do not designate any other property as your principal residence for this time.
    http://www.cra-arc.gc.ca/tx/ndvdls/t...gngll-eng.html

    Since property #2 was bought ... it is not clear to me that losing the property #2 PRE is worth the effort. It may be easier to stick with property $2 is the new PR as of the conversion date and eventually reporting the CG on property #1 from the date the use changed.


    Cheers


    PS

    Be advised that starting in Oct 2016, regardless of whether the PRE eliminates all of the CG from selling a PR - the sale now has to be reported on one's tax return on Schedule 3.
    http://www.cra-arc.gc.ca/gncy/bdgt/2016/qa11-eng.html

    In previous years - if the CG was wiped out, then the sale did not need to be reported.

    As you now own a rental property and a PR, that means eventually each sale will need to be reported where the PRE is going to reduce or eliminate the CG for the PR.

  6. #6
    Senior Member
    Join Date
    Oct 2010
    Posts
    7,040
    Quote Originally Posted by CPA Candidate View Post
    Quote Originally Posted by redsgomarching View Post
    ... conversion of use of primary residence to a rental property does trigger a deemed disposition (meaning you will would have technically disposed of the asset at its FMV) and will have to report capital gains on the deemed disposition ...
    I second this.
    { bold text is my emphais }

    The OP says it was converted Sept 2015 where it looks like the full PRE will wipe out the CG. As this is under the old rules, I am not clear on why a deemed CG would need to be reported.

    Unless there is some reason to believe the full PRE won't wipe out the CG?


    Going forward, due to the Oct 2016 changes for the 2016 tax year - selling either property means reporting the CG on schedule 3. The difference is the PR will be allowed to claim the PRE.


    Quote Originally Posted by CPA Candidate View Post
    Quote Originally Posted by redsgomarching View Post
    Note that you will now technically have acquired the rental property at FMV and can now claim CCA on that amount and deduct that against the rental income generated.
    I wouldn't do this though.

    Claiming CCA on something that is not really depreciating is going to come back and bite you later when you have CCA recapture on sale. You will need to take it into income all in one year and it could send you into the top tax bracket.
    +1.


    Cheers
    Last edited by Eclectic12; 2017-01-04 at 05:49 PM. Reason: added bolding as well as detail

  7. #7
    Member
    Join Date
    Sep 2014
    Posts
    78
    Have your accountant advise you the proper way to handle this situation. You will fail an audit if you try to do it yourself.


Posting Permissions

  • You may not post new threads
  • You may not post replies
  • You may not post attachments
  • You may not edit your posts
  •