# Rental Property Taxation



## meddlesomemarmots (Feb 16, 2011)

I am looking into purchasing a newer condo unit, as a method of adding a source of income, and also building building equity in something fairly affordable in the pretty expensive real estate in the Greater Vancouver market.

Just looking at things - currently me and the other half rent presently - are in a nice suite in a house, and as utilities etc are included with rent price, things are very very comfortable for us, and we like the place.

However, with one eye on the future (especially considering how out of reach SFH property is in the local market here), I have been looking at buying a condo unit, and renting it out from day one - with the aim of creating a large tax deduction whilst the interest repayments on the mortgage would be at their highest, whilst picking up rent payments for the property, and paying down a fair chunk of the mortgage within the first through years. This should then give us the option of carrying on paying down that place (and potentially paying most of it off after the first mortgage renewal comes up after around 5 years), continue renting it out and living elsewhere - or selling, if we are in a better financial position and can reach for a SFH, but needed the money to bolster the down payment.

My question is this - I know that there are capital gains implications for rental property - but would there be there any implication on income taxation, if like I explained mortgage repayments were deducted whilst renting out the unit, and then the unit became a primary residence after a few years? I assume the CRA wouldn't try and claw back any of the tax deductions from when it was a rental property, though it became a primary residency?

Hopefully this makes sense.


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## ghostryder (Apr 5, 2009)

meddlesomemarmots said:


> My question is this - I know that there are capital gains implications for rental property - but would there be there any implication on income taxation, if like I explained mortgage repayments were deducted whilst renting out the unit, and then the unit became a primary residence after a few years? I assume the CRA wouldn't try and claw back any of the tax deductions from when it was a rental property, though it became a primary residency?
> 
> Hopefully this makes sense.



Your rental income is taxable. You cannot expense (deduct) the principle portion of mortgage payments. The interest portion is an expense. When you move in and convert to a personal residence you will have a deemed disposition and will have to pay capital gains tax. If you claim CCA on the rental property you may have CCA recapture when you convert to a PR.


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## Sampson (Apr 3, 2009)

meddlesomemarmots said:


> I assume the CRA wouldn't try and claw back any of the tax deductions from when it was a rental property, though it became a primary residency?


No, they won't do this.

I really would stress the importance of doing some hard core number crunching. This doesn't sound like a good investment at all. The rates for rent most certainly won't give you a reasonable ROR, spend your money elsewhere.

What will most likely happen is that the expenses to carry will be huge, your income from the property may or may not cover these expenses, and the loss from the venture can be used to deduct your current income taxes (but only a portion if the property is co-owned). So unless you are making a tonnein employment income now, the value of such a deduction might be relatively small.

Crunch some numbers.


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## MoneyGal (Apr 24, 2009)

meddlesomemarmots said:


> I have been looking at buying a condo unit, and renting it out from day one - *with the aim of creating a large tax deduction* whilst the interest repayments on the mortgage would be at their highest


Careful. CRA may well disallow the losses if they determine there is no reasonable expectation of profit from your rental business.


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## the-royal-mail (Dec 11, 2009)

I agree that more specific number crunching is necessary. Renting a condo is WORK and expense. Consider the monthly mortgage, property tax, maintenance/repair and condo fee expenses. Find out what these are for the specific unit you are interested in. Then find out what comparable units rent for in that bldg. You may be unpleasantly surprised. I once rented out a condo that was costing me out of pocket about $1600/month, but the net rent income was only around $975. I had to leave the condo quickly and it became my non primary residence after I moved elsewhere.

As well, good luck selling your condo when you've got tenants in there. If they are offended by and prevent access by RE agents, you'll find yourself stuck as I was, with a tenant occupying your property whom you have to chase, beg, plead with to provide access for buyers to come and view. This is very inconvenient because it happens when you are busy trying to live your life!

I can't recommend anyone electing to do this. When you add it all up it's not any kind of a bargain unless you're prepared to invest time, sweat equity and money and can get the place really cheap upfront.


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## Sampson (Apr 3, 2009)

@MG,

Do you know of examples where the CRA has rejected loss claims on investment properties? I always saw it as a catch-22 (sort of like investing for capital gains with leveraged money), I suppose eventually once the mortgage is paid off, then you will be generating income on the investment.

I know with small businesses CRA typically only allows a few years (<5?) of negative income before they disallow interest deductions, but rentals?

@TRM,

Not all rentals/condos' are bad, nor is the work really that significant (can be of course). But in this case I fully agree with you, I just know for the GVA, rental rates and housing prices are no where near where an investor wants to be. I think you would be lucky to get cap rates above 2-3%.

If you could get Kits' rents in Coquitlam or further, MAYBE, but unless you can rent the new unit out at $1700-$2000/mo., on a $250k-$300k unit, you are hooped.


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## MoneyGal (Apr 24, 2009)

Addendum: someone may pop in and remind me that REOP was "struck down" by two SCC cases in 2002 (Stewart and Walls). CRA's response to Stewart and Walls is that:

- the REOP test was based on their reading of an earlier SCC case, Moldowan

- they will continue to use the criteria set out in Moldowan in determining whether an activity is "sufficiently commercial" to allow losses

Here's the specific technical note from CRA. 

Short version is that I should stop using "reasonable expectation of profit" to characterize the CRA criteria but should use the new phrase "sufficiently commercial." The technical note I linked provides the specific review criteria CRA will use.


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## MoneyGal (Apr 24, 2009)

x-post with Sampson. The most notable cases are Stewart and Walls, in which the taxpayers LOST all the way to the Supreme Court, which provided new criteria to determine whether rental losses are deductible. 

Both before and after Stewart and Walls rental losses have been disallowed by CRA. I can't comment on how frequent disallowances are, because I don't know and CRA doesn't tell. The technical note I linked provides much more detail.


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## meddlesomemarmots (Feb 16, 2011)

Thanks for the responses everyone - it is much appreciated.



the-royal-mail said:


> I agree that more specific number crunching is necessary. Renting a condo is WORK and expense. Consider the monthly mortgage, property tax, maintenance/repair and condo fee expenses. Find out what these are for the specific unit you are interested in. Then find out what comparable units rent for in that bldg. You may be unpleasantly surprised. I once rented out a condo that was costing me out of pocket about $1600/month, but the net rent income was only around $975. I had to leave the condo quickly and it became my non primary residence after I moved elsewhere.


Solid advice - for the day job I work in a Property Management office, so see the account statements people go blindly into these kind of things frequently. This does provide the advantage that I get an employee discount on the cost of professional management on rentals.

As for the specific building - I'm looking at a project that is under construction in a area mostly populated with retirees and families - but has great access to public transit. For costing - I'm taking an estimate that the fees will be $250 a month at most (it is an 'amenity free' building - so no swimming pool, GYM etc).

On the estimate that every cost is at it's most (i.e. condo fees hit the $3000 a year), and I get pull in a rent of $1000 (low end estimate for a brand new one bedroom, one bath) - there will be a short-coming from rent of about $3,000-$4,000 for year one. On my figuring, the principle payment on the mortgage on year one would be around $4,400 - so I would still be putting under that out of my own pocket (the shortcoming from the rent). So looking at this, with a tax deduction included, I'd be gaining an extra $1,000 in the first year - looking at the rental income balancing out the tax deductible expenses, and adding to the equity.

It is definitely a borderline decision, based on those numbers, and doesn't factor in vacancy periods. That said, time is on my side, and I'll definitely be watching the market closely until they've completed the building of the building I'm looking at.


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## Sampson (Apr 3, 2009)

Those are not good numbers IMHO.

To invest your 5-20% down and get a return of $1000/year is a poor investment. To rely on tax deductions and mortgage paydown on a revenue neutral property is not a good investment.

One single repair, appliance, month of vacany will eliminate all your income from the property. Combine 2 or 3 of those, and you'll be bleeding money. Check out CMF member Berubeland's blog and specifically the one on calculating ROE or 'cap rate' on rental properties.


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## Randomtask (Feb 22, 2012)

Hey guys,

Here is my situation. I purchased a house in 2010 as a rental income property and claimed a loss last year for 2010 on it as my tenants took off and so on...

In 2011, both of my tenants paid on time and I will have a net income after deducting utilities, mortgage interest, and property taxes. I'm wondering whether to deduct cca...

Purchased house for $310,000. In 2010, no cca was deducted. Assuming I allocate 80% of purchase price to the house, I can deduct ($310,000 x 80%)/27.5 = $9018 this year....

If I was to sell the house in 10 yrs, there would be a recaptured income of $9018 x 10yrs = $90,180... Is this correct? I would pay income tax on this amount the year I sell the house?


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## Eclectic12 (Oct 20, 2010)

Sampson said:


> @MG,
> 
> Do you know of examples where the CRA has rejected loss claims on investment properties? I always saw it as a catch-22 (sort of like investing for capital gains with leveraged money), I suppose eventually once the mortgage is paid off, then you will be generating income on the investment.
> 
> ...


Hmmmm ... I suspect whatever tests CRA's computers run to flag "too many consecutive losses" are run against reported rental income, regardless of whether the tax return is for a small business or an individual.

However, I don't have any inside information so I don't know.

Cheers


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