# converting principal residence to rental property



## w0nger (Mar 15, 2010)

I've done a few searches online but everything online assumes that the property is completely paid off. In my case, I'm going to be buying a house and simply moving out of the existing property. On the day that I move out, does the house then become an income generating property? Can I simply use that date and start calculating the interest being paid so that I claim it on my income taxes? Or are there forms or any paper work that I need to fill out to declare that it's not an income property. Thanks.

Any links to a guide?


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## andrewf (Mar 1, 2010)

You should get a reasonable assessment of value, as your capital gains exemption for the old property is only as far as when you moved out. Any capital gains from that date are taxable.

My understanding is that the loan is not deductible, because it was initially used for non-investment purposes. You may be able to argue with CRA about it, but I have seen no evidence that your argument would be deemed valid. You can either do a series of transactions (which I think would incur land transfer tax and legal fees) to put a fully deductible loan against the property, or do it gradually through cash damming.


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## orange (Oct 23, 2011)

the house does not become an income generating property the day you move out if you have no intention of renting it...but why move out and let a vacant place just sit there? If you are listing it and you have the intention of renting it, the vacancy expense is a legitimate operating expense that can be deducted from your rental income, or your regular income if you have a net loss (say you move in Nov and don't get a tenant until Jan - you will have a loss for the year due to expenses in Dec, but no rental income).

You do not need to do anything with your mortgage - it doesn't matter what the original purpose of the loan was for, it's the current use that matters. You do not need to argue with CRA or do anything complicated (though cash damming is beneficial), *the mortgage interest is deductible*. Once you have a tenant and rental income, you can deduct all your operating expenses (property taxes, mortgage *interest*, maintenance, etc) from the rental income.


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## w0nger (Mar 15, 2010)

awesome, thanks orange. 

any more tips from anyone?


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## themortgageguy (Jun 28, 2012)

w0nger said:


> awesome, thanks orange.
> 
> any more tips from anyone?



I would agree with orange. If you incur expenses to generate taxable revenue then those expenses are tax deductible. On the day you officially rent the home out you have a deemed disposition of the property at FMV. That needs to be included in your tax return as a capital gain (safe to assume you will have one) BUT it should be fully negated by your principle residence deduction assuming you have always lived in the home. I would assume that an appraisal would be necessary if CRA ever wanted to dig into it but check the CRA website for the rules. Any appraiser should come in at close to the same FMV but some do vary by quite a bit. Best to have the appraisal done in early srping or fall (busy real estate market) for maximum FMV for possible future capital gains.

That being said, although nothing would likely come of it most mortgage clauses have a principle residence clause in them and this would not be your principle residence once you move (obviously). Pay attention to this at renewal. This happens frequently and if your mortgage is insured and the new home mortgage is insured with the same insurer, the insurer does keep track of home many "principle" residences you have. An individual can have a principle residence and a second residence insured but no more than that. Some people could have more if they use the three insurance companies services (CMHC, Genworth and Canada Guarantee).


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## w0nger (Mar 15, 2010)

thx... i'll keep that in mind.


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