# Fair market value calculation?



## Synergy (Mar 18, 2013)

How does one determine fair market value of a property when there is a change in use from personal-use to income producing (rental property) - appraiser, real estate agent, etc? The property I'm referring to would be my current primary residence so the deemed deposition won't result in any tax obligations / capital gains at the present time. I'm thinking about any future captial gains or loses should the property be sold 5-10 years down the road.


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## Just a Guy (Mar 27, 2012)

You need some sort of paperwork from a reputable source. CRA, as usual, isn't very clear on exact requirements. Of course, it's in your best interests for the appraisal to err on the high side in this case...


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## Synergy (Mar 18, 2013)

Thanks, I'll make sure I get something in writing - likely from an RE agent who knows the area well.


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## AltaRed (Jun 8, 2009)

Synergy said:


> Thanks, I'll make sure I get something in writing - likely from an RE agent who knows the area well.


Everything I've ever read on tax forums says an appraisal from a qualified appraiser is required. As I understand it, there is case law from Tax Court that says CRA will not (and does not have to) accept a Real Estate agent's 'market assessment'. A realtor will never give you an 'appraisal', only a 'market assessment'. You take your chances not having a formal 'appraisal'.


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## RBull (Jan 20, 2013)

^+1

This question seems to be asked regularly on here. Don't scrimp on cost of a professional appraisal when significant money and a potential dispute with CRA is at stake. 

I received 2 real estate assessments and had 1 professional appraisal when selling my last home privately a few years ago. I sold at the exact price (+$500) the appraiser had given me which was $18k more than the highest suggested "listing price" from the real estate agents. Agents are sales people. Appraisers value properties.


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## Rusty O'Toole (Feb 1, 2012)

A building called "apartments" is worth about half what the same building is worth if you call it "condos". 

In the case of a single family home, duplex or triplex the difference is practically nil because there is nothing to stop you selling to an owner occupant.


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## Synergy (Mar 18, 2013)

Thanks, for the replies. I will have a professional appraiser provide me with an appraisal. I'm not concerned over a couple dollars, I just want to have things done properly.


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## Just a Guy (Mar 27, 2012)

The cost of the appraisal can, of course, be written off as an expense.


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## Synergy (Mar 18, 2013)

FWIW - I just spoke with my accountant and I'm told that an appraisal is not necessary.


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## MoreMiles (Apr 20, 2011)

Synergy said:


> FWIW - I just spoke with my accountant and I'm told that an appraisal is not necessary.


Please tell him neither is an accountant. The same thing can be done by software or these non-accountant tax preparer... And see what he says?!

You are looking at $300 expense so don't be cheap. Or you can apply for a mortgage, get the bank to pay and do it for you, get the report, and tell them you change your mind because you don't need the loan any more.


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## OhGreatGuru (May 24, 2009)

OP refers to a "Personal Residence", not a "Principle Residence" . If the house in question is not a "Principle Residence", then I believe capital gain has to be reported (based on FMV) at the time the use is changed. 

When there is a change in use from principle residence to a secondary residence or an income property, you shouldn't need an assessment to determine future capital gains. Because the formula for calculating the capital gains depends only on:
- What the original purchase price was;
- What it eventually sold for;
- The total number of years it was owned; and
- The number of years it was a principle residence;

The percentage of capital gain that is exempt from tax is simply pro-rated based on its years of use. The FMV at the time of change is not used at all.

There may be other reasons for wanting an FMV (maybe it affects capital cost allowance?) but I'm not familiar with them.


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## Synergy (Mar 18, 2013)

I was referring to my principle residence. When a property changes from personal to business (rental), the CRA considers the property to have been sold (deemed diposition) at fair market value. If the property is your principle residence, you won't have to pay any taxes on the gain. Even though a property is considered a principle residence, I'm pretty sure the CRA uses the FMV at the time of the deemed deposition for the purpose of calculator future gains / losses.

Anyhow, it's not about money. I'm going to get 2 appraisals and a few real estate assessments and we will determine which one to keep on file.


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## agent99 (Sep 11, 2013)

In Ontario at least, municipal taxes are based on Fair Market Value. Of course, there you want the lowest number. But it is an official number that could perhaps be used. However, I don't think they are updated annually. Your future CG or Loss would be based on whatever number you choose. Whether CRA would question your number down the road when the business sells the property is another question. Getting an appraisal is probably a good idea if you think it will be higher than the one used for municipal taxes.


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## Synergy (Mar 18, 2013)

MPAC assessments are far from FMV in my neck of the woods, especially for properties that have never changed hands. I would never trust an MPAC assessment to provide an estimate of fair market value at this point in tme. CRA wouldn't have a leg to stand on when the average home is selling for 20-40% above MPAC values at the time of the deemed deposition.


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## OhGreatGuru (May 24, 2009)

Synergy said:


> I was referring to my principle residence. When a property changes from personal to business (rental), the CRA considers the property to have been sold (deemed diposition) at fair market value. ...
> Even though a property is considered a principle residence, I'm pretty sure the CRA uses the FMV at the time of the deemed deposition for the purpose of calculator future gains / losses.
> 
> ...


No, it doesn't use the FMV. T4037 (In the leading paragraphs of "Changes in Use") unfortunately makes this general statement about deemed dispositions, without explaining that the FMV is not used to calculate the capital gains when there is a change of use of a principle residence. Read it120R6, section 8, for an explanation of how it is calculated.


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## Synergy (Mar 18, 2013)

OhGreatGuru said:


> No, it doesn't use the FMV. T4037 unfortunately makes this general statement about deemed dispositions, without explaining that the FMV is not used to calculate the capital gains when there is a change of use of a principle residence. Read it120R6, section 8, for an explanation of how it is calculated.


It would appear that you are correct, the formula being: A x (B / C) where A = gain, B = 1+ # yrs as principal residence, C = total # of tax years. Strange how they keep using the term FMV at time of the deemed disposition.

What would happen when someone claims CCA on a rental property that has been converted from a principal residence? Would you not need to know the fair market value at the time of the deemed disposition in order to calculate the CCA? No plans on claiming CCA, just curious.


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## agent99 (Sep 11, 2013)

OhGreatGuru said:


> No, it doesn't use the FMV. T4037 (In the leading paragraphs of "Changes in Use") unfortunately makes this general statement about deemed dispositions, without explaining that the FMV is not used to calculate the capital gains when there is a change of use of a principle residence. Read it120R6, section 8, for an explanation of how it is calculated.


I am sure you are right for many cases. Maybe in subdivisions with many similar cookie cutter homes it might be closer.


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## bandana (Sep 18, 2009)

But how do you calculate A (ie. gain) when converting a principal residence to a rental property?

According to IT-120R6 Section 8,

"That is, the gain otherwise determined is calculated without taking into account the increase to the adjusted cost base of the property under subsection 110.6(19) or the decrease to that adjusted cost base under subsection 110.6(21). "

So would A (gain) be the same as the original acquisition price?


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