So I have a bought a house, and am contemplating renting out my loft instead of selling it. So I would need to do a deemed disposition, as my principle residence will become my new house, and the loft will be converted to a rental property. I am thinking mostly about cash flow and how to avoid/minimize taxes on this new income, especially in the first year or so as I'm renovating and cash will be king. I was thinking that I could use CCA in order to bring my income to nothing each year, but need to understand what the UCC will be on my loft. I purchased it for $320k 4 years ago, the bank is going to appraise it at roughly $450k, so that I can do an equity take out. When I do the deemed disposition, I understand my new ACB for capital gains purposes will be $450k, but if I want to claim CCA on the rental, will my UCC be the original cost (of $320k)or the FMV at change of use ($450k)?
I have been reading, and understand that I may have CCA recapture issue upon sale if I sell it for more than the UCC. Even if this amount is $320k, I suppose I'm just deferring paying the tax until later, which isn't necessarily a bad thing - just want to be sure I understand!
the UCC is based on the value after the change in use -- the $450K
But you have to apportion that between Land (for which there's no CCA) and building (for which there is). Once you've established the fair value -- likely the banks appraisal number -- calculate the Land/Building split based on the same percentage as your property tax assessed value breakdown.
Also of note -- the interest on the remaining original mortgage to acquire the loft will be deductible -- but interest on any subsequent borrowing (unless used to reno the loft) will not. So if it's an option, and you're borrowing against the loft, consider separate LOC or tiered mortgage so that you can pay off that non-deductible bit separately.
One other question - do I physically have to report the deemed disposition on my taxes??? I am looking around in Ufile, and I do not see anywhere where I file the deemed disposition, so that my new ACB on the loft is at the FMV when I changed the use from personal to rental. I just want to be sure that I'm sheltering my gain when it was indeed a primary residence.