# Principle Residence



## jdbucky (Jun 7, 2010)

I need information on how to calculate the tax on a house that I rented a portion of, then converted to all rent and moved to a new house that has been my principle residence for 6 years. I have read the CRA forms but they are written by lawyers for lawyers an an ordinary guy needs a translator. Sold the first house this year.


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## AGHFX (Aug 31, 2012)

Did you or your accountant (if you use one) adjust the cost base of your [rental] house at the time it was converted to all rent? There's 2 steps to calculating the taxes on your sale:

I'll use numbers to help explain. Let's pretend you purchased your house for $100,000 and you rented 50% of the house.

Step 1 - converted house to rent 6 years ago
This is where adjusting the cost base comes into play. For simplicity's sake let's pretend the fair value (or appraised value) of the house at the time of conversion had increased to $200,000. That leaves you with a $100,000 *total* gain. Only $50,000 of the $100,000 is subject to capital gains tax on 50% of the gain (meaning $25,000 will be taxed). This is because 50% of it was your personal residence. Don't worry - the tax obligation is not created here - you simply take note of the gain because you'll need it later.

Because there has been a change in the use of this property (you moved out and converted it to 100% rentals), your new adjusted cost base of the property is $200,000.

Step 2 - sold the house this year
Let's pretend you were able to sell this house for $300,000. Although you purchased it for $100,000, the cost base was adjusted to $200,000 when you moved out 6 years ago. This results in a $100,000 gain *on this sale alone*. The entire $100,000 is subject to capital gains tax on 50% of the gain (meaning $50,000 will be taxed). This is because now 100% of the property was used for rentals.

Using the numbers in my example, you would claim a $150,000 gain on schedule 3 on your 2013 tax return. You will be taxed on $75,000 of the gain ($25,000 discussed in step 1 + $50,000 discussed in step 2). That $75,000 will be multiplied by the capital gains tax assigned to your marginal tax bracket to calculate the amount owing on the sale.

I apologize if my example is a bit unclear - if needed, I can try to explain it another way. Either way, you can basically follow the example above using your own numbers to calculate your gain and tax obligation.


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## Eclectic12 (Oct 20, 2010)

There may be another step to consider from a capital gains perspective. 

When part of the house is rented, the tax book I had years ago said to make sure not to claim an capital cost allowance items or it could result in the percentage of the house being rented being subject to capital gains. If the run of the mill items were claimed in a matching percentage (ex. 10% of square footage rented = 10% insurance, heating, phone, ... etc.), then the house would still be covered under the personal residence exemption.


Not sure if this is the case or how likely CRA is to notice but to avoid surprises, I thought I'd mention it.


Cheers


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## AGHFX (Aug 31, 2012)

Good point, Eclectic - I forgot to mention capital cost allowance as it's not very common on the individual level. In my experience, corporations and holding companies almost always claim CCA - but usually not individuals. Capital cost allowance only needs to be factored into the adjusted cost base if it was claimed annually since purchase. The allowable CCA deduction reduces taxable income each year, reducing the adjusted cost base and increasing the gain at the time of reappraisal (when you moved out) or sale. If CCA was never claimed over the duration of ownership then there is no impact on the adjusted cost base - rationale being the allowable annual amount was never used to reduce taxable income throughout the duration of ownership.


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## jdbucky (Jun 7, 2010)

thanks for the input about what I thought. CCA was always claimed so will have to find records of how much. I don't believe the change of use was reported to CRA so that's a potential problem. There seems to be a 4 year grace period but have missed that


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## AGHFX (Aug 31, 2012)

If you did claim CCA then you can look back at old returns and add the amounts to deduct from your adjusted cost base. If you don't have copies of the returns you can phone the CRA enquiries line for individuals and they can tell you. You don't need to report the change of use to CRA - you just need to adjust your cost base. The only thing is if your 2013 return happens to be audited then CRA may require support for the change in cost base (i.e., in step 1 of my example, how did you come to determine the value to now be $200,000 and is that figure reasonable).


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## Cal (Jun 17, 2009)

It may be worth your time and money to consult with an accountant.


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