# To sell as principle residence or rental unit?



## faline (Feb 10, 2011)

Will be listing my home for sale in the next month or so. I lived in it until a few months ago, so it has been a rental property for less than a year.

My question for tax time: Do I delcare it a rental property or principle residence? (I know I can declare it PR for up to 4 years, as I've not declared another home as such) 

From what I've gathered, here are my pros and cons:

Principle residence

PROS:
NO Capital Gains tax

CONS:
Can not claim real estate fees, lawyer fees(?), other(?) closing costs

Rental property

PROS:
Can claim the follow during tax time:
property tax
lawyers fees
real estate agent fees
interest rate fees
I will have to pay ~$8000 to the bank to break my mortgage...can I claim this amount at tax time? 
Other insignificant expenses (I haven't had to do any maintenance or repairs or upgrades, etc) 

CONS:
Capital gains tax for 50% of one year appreciation

At this point I'm not sure yet what the appreciation of the last year has been. I don't think TOO too much though... 

Am I missing anything??

Thanks, feedback greatly appreciated!!

Faye Faline


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## Charlie (May 20, 2011)

Under one scenario the gain is fully tax free. Under the other you can reduce the taxable gain by various dispostion costs (real estate commiss/lawyers fees/selling etc).

The operating costs (prop tax, interest, maint) will be deductible for the period of rental only under either scenario.

I can't see why you wouldn't claim PR for the full ownership.


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## iherald (Apr 18, 2009)

The issue is how much is the gain? Does the tax savings on the gain equal to the tax savings of writing off the other stuff? We can't tell you which is better without that information.


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## MoneyGal (Apr 24, 2009)

I don't know the answer to this, but wouldn't the costs of disposition be prorated to account for the amount of time the house was a PR, and the amount of time the house was used for rental? 

So if the house is owned for a total of four years, and then rented out for 0.75/year, wouldn't you prorate the cost of the mortgage-break fee to (0.75/4) = 18.75%?

I can't find any scenario in which you are not ahead claiming for the entire time as PR. The issue - as Charlie said - is that you bring the gains in, and then you can only take deductions against some portion of the gains. You can't take deductions against the totality of your costs, because the residence was not used exclusively as a rental.


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## faline (Feb 10, 2011)

Oh, I didn't realize I could claim those things under either scenario... PR seems to make more sense for sure! 

Do you (or anyone) know if I can claim that $8000 in break the mortgage fees as part of the closing costs? I can't find that info on CRA website.


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## faline (Feb 10, 2011)

and thank you!


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## iherald (Apr 18, 2009)

I also just thought, you can only deduct your capital losses against capital gains. So if you made $10 on the house, in theory you can make it so you pay no taxes on the house and may have something left over to deduct from future capital gains. But, it doesn't decrease your taxable income otherwise (as far as I know)


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## faline (Feb 10, 2011)

MoneyGal said:


> So if the house is owned for a total of four years, and then rented out for 0.75/year, wouldn't you prorate the cost of the mortgage-break fee to (0.75/4) = 18.75%?
> 
> Ah, that does make sense (unfortunately for me).


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## Charlie (May 20, 2011)

My gut on the $8K is that it is a disposition cost. So if you're claiming PR it's moot. I can't see them allowing an expense that was incurred so that you could sell the place against operating income given your very short rental period. Besides....since it's being paid out on the sale, it's being incurred after your rental period has ended. 

I've no reference for this. Just my thoughts. It wasn't a cost of renting the place.


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## faline (Feb 10, 2011)

Thanks again


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## cardhu (May 26, 2009)

faline said:


> Oh, I didn't realize I could claim those things under either scenario...


You can’t … if you claim the PR exemption for the entire ownership period, then you can’t claim any of those other things at all. 



faline said:


> Do you (or anyone) know if I can claim that $8000 in break the mortgage fees as part of the closing costs?


Its effectively interest … you’re compensating the lender for all the interest income they would have earned, over the remainder of your term … I vaguely recall having seen some guidance that in some cases, such a fee can be deducted – as an interest expense – on a prorata basis over the years that the penalty relates to … however, since you’ve only been renting the place out for a fraction of your total ownership period, that may not be applicable or useful. 

OTOH, if you selling to move closer to work, and you meet CRA’s criteria for deductible moving expenses, then it may fit under that category. 

iherald makes a good point that if you’re taking a loss on the sale of the house, then there’s no point claiming the PR exemption, and there’s especially no point in extending the exemption to cover the rental period. Better to carry forward a slice of the capital loss to offset against future gains, than to just absorb a loss with no offset.


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