# Capital Gains on former Primary Residence



## thompsg4416 (Aug 18, 2010)

I did a search and found a few threads on this already so I have an idea but its not all clear... 

Anyway my situation - I lived in my condo for 3 years before moving out and turning it into a rental for almost the last 3 years. I bought for 195 and sold for 216(5 years and 10 months later). I realize I need to pay CGT on 50% of my profits at my marginal tax rate(?)but in this case what is my profit? Is it only on the buy and sell price or does it include equity built up over the 3 years as a rental. I assume I can write off agents and lawyer fee's and other expenses against the profits?

Finally when is the tax bill due? At the end of the tax year like personal income taxes? 

Thanks I'm totally ignorant on this one!


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## Eclectic12 (Oct 20, 2010)

When you moved out of the condo and started renting, the condo was deemed to have been sold. 
This sets your cost base for calculating the capital gain (or loss) when the condo is sold as the capital gain from "selling" when it was converted to a rental is tax free due to it being your primary residence.

http://www.cra-arc.gc.ca/tx/ndvdls/...-ncm/lns101-170/127/rsdnc/chngs/menu-eng.html
http://www.taxtips.ca/personaltax/propertyrental/changeinuse.htm

The problem with real estate is that it is hard to know the value so the advice when changing to a rental is to get an appraisal.
That way if CRA looks at the numbers for that area and questions the cost base used, it is based on another party instead of you.

The question now is ... what was the condo "worth" when the change happened?

For example, bought for $195K (I assume it's not really $195 :biggrin. 
Three years later when it became a rental, say it would have been appraised at $205K.
The $205K becomes the cost base, so that the capital gains calculation would be proceeds - cost base - expenses to sell.
This would be $216K - $205K - $x.

Whatever the final capital gain, it is reported on your tax return and the tax forms will have a line to reduce it by 50% to send up with the taxable amount.


The capital gain is not on how much you own (i.e. the equity) but is on the rise in value of the capital property. 
Whether the bank owns 10% or 99% of the condo, the capital gain is always the rise in value. 
For stocks, I can borrow so that I own nothing of the stock but I still pay capital gains tax on the rise in value when the stock is sold.

The key point is that whatever it rose between buying to use the condo as a primary residence and the switch to a rental should not be included as the primary residence is capital gains tax exempt.

If you want to be sure you will have no trouble with CRA, you could use the entire gain ... but then you are paying more taxes than are owed.


Yes, since the rental is for a profit, some expenses can be deducted. I'm hoping you have already been deducting the applicable ones to reduce the rental income that you have been reporting on your yearly tax return so that you pay income tax on the smallest amount possible.
http://www.taxtips.ca/personaltax/propertyrental/rentalexpenses.htm
http://www.cra-arc.gc.ca/tx/bsnss/tpcs/rntl/bt/rprt/xpns/menu-eng.html


Capital gains taxes ... just like for stocks are typically reported on your tax return for the year the capital property (in this case a condo) was sold.


Cheers

*PS*

You might have to pay by installments as the taxes owing may be a large amount.
http://www.cra-arc.gc.ca/nwsrm/txtps/2013/tt130306-eng.html

Not that I've done a study but I have not heard of CRA bothering people unless it is clear that the large taxes owing is going to be a repeated situation. You can always call them and confirm.


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## thompsg4416 (Aug 18, 2010)

Eclectic thanks for the detailed response!! Its appreciated. The place is in Quebec so I really did buy it for 195. So as I understand it - The capital gain was about 20k over 6 years or on avg about 3300 per year. It was a rental for 3 years so that's about 10k. So I'd pay tax on 5k less any deductions. I realize that's not perfect and the actual value when it turned to a rental may have been different but it gives me a good idea of what I should owe. 

I made the regular dedications yearly against the income on the rental so I'm good there. 

So 5k x 43%(est. Mariginal tax rate) means I owe about $2150. I'll let the accountant deal with the details but its always helpful to have an estimate for budgeting purposes.


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## pedanticus (Apr 30, 2014)

I'm not sure of your situation, but this may apply to you:

http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/rprtng-ncm/lns101-170/127/rsdnc/chngs/chngngll-eng.html

If you did not designate another property as your principal residence when you turned the condominium into an income property, you may be able to continue to enjoy the principal residence exemption on it for at least an additional four years. We plan to do this with a family member's condominium when she moves in with us and we rent out her place.


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## OurBigFatWallet (Jan 20, 2014)

Deemed disposition when you turned it from a principal residence into a rental which becomes the cost to calculate the capital gain. Also possibly a recapture if you took CCA while it was a rental. For the deemed disposition cost in most cases an appraisal at that point works or if that's not possible a market analysis at that point showing recent com parables that have sold for a similar price. Basically you need to justify the cost you use and more data the better. If you need more info on this email me, I just had a couple clients get a request for more info from CRA as they questioned the cost used


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## Eclectic12 (Oct 20, 2010)

thompsg4416 said:


> Eclectic thanks for the detailed response!! Its appreciated.


You are welcome.




thompsg4416 said:


> The place is in Quebec so I really did buy it for 195.


So you really bought for $195.00 and sold for $216.00 so that there is a $20K CG? :biggrin:
Interesting math ....

To repeat - my point was that you appeared to have dropped the "K" from the numbers in the OP.




thompsg4416 said:


> So as I understand it - The capital gain was about 20k over 6 years or on avg about 3300 per year.


I get $21K ($216K - $195K) so I assume you are expecting $1K of expenses to be written off.




thompsg4416 said:


> It was a rental for 3 years so that's about 10k. So I'd pay tax on 5k less any deductions. I realize that's not perfect and the actual value when it turned to a rental may have been different but it gives me a good idea of what I should owe.
> 
> I made the regular dedications yearly against the income on the rental so I'm good there.


More or less ... the possible wrinkle here is that this assumes the condo value grew in a straight line. CRA might question this based on other info they have. 




thompsg4416 said:


> ... So 5k x 43%(est. Mariginal tax rate) means I owe about $2150. I'll let the accountant deal with the details but its always helpful to have an estimate for budgeting purposes.


I'd recommend also going over whether the election mentioned in the post by pedanticus is still possible. 
You mention you've been reporting the net rental income and it doesn't sound like you've claimed capital cost allowance (CCA) so you might be able to avoid the CG.

I was thinking that an "after the fact" election would not be accepted but if you have an accountant, it does not hurt to be sure.


Cheers


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## MoneyGal (Apr 24, 2009)

Eclectic12 said:


> I'd recommend also going over whether the election mentioned in the post by pedanticus is still possible.
> *You mention you've been reporting the net rental income and it doesn't sound like you've claimed capital cost allowance (CCA) so you might be able to avoid the CG.*


Caution! Please note that not claiming CCA means you can avoid _CCA recapture_, not avoid the taxation of capital gains. Capital gains and capital cost allowance are two distinct concepts! Do not mix them up!


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## Eclectic12 (Oct 20, 2010)

I did start with talking about investigating *the election* and closed by questioning whether the election was possible after the fact. 
I would hope it was clear that I saw the exemption from capital gains tax on a rental condo as the result of the election.

It probably would have been clearer if I had included "you might be able to avoid the CG _by making an after the fact election._"

I was assuming that not following the requirements that result from the election (i.e. claiming CCA) would automatically rule out making the election.


I base the exemption on the link posted upthread which says:



> ... you can make an election not to be considered as having started to use your principal residence as a rental or business property ...
> While your election is in effect, you can designate the property as your principal residence for up to four years, even if you do not use your property as your principal residence.


So where the rental property has the proper election and is designated as a principal residence despite being a rental, there should be no capital gains tax to pay, n'est pas?

Or am I missing something?


Cheers


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## MoneyGal (Apr 24, 2009)

OK, I read your sentence out of context - apologies!

The OP has not provided enough information to know whether he/she can make a valid election or not. It will depend in part on whether the OP had another house occupied as a PR during the period in which the condo was rented.


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## Eclectic12 (Oct 20, 2010)

No worries ... I could have been a lot clearer.

As for a valid election - the first concern I have is how lenient CRA would be about doing it after the fact. Having another PR would also be another action that would likely invalidate an attempt to provide the election.


However - if the OP can ask the accountant, it may well end up being worth the time.


Cheers


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