Renting my 'primary residence' & capital gains

[jackboot]

I've tried to find info on google but can only find info for Americans...

I have lived in my home for the almost 1.5 years but need to move East for grad school. I think I want to rent my home rather than sell it.

If I rent my home now rather than sell it, when I do sell it some time from now, how does capital gains tax work? Will I no longer qualify for a tax-free sale of my home?

Thanks in advance!:)

[cadave]

I've tried to find info on google but can only find info for Americans...

I have lived in my home for the almost 1.5 years but need to move East for grad school. I think I want to rent my home rather than sell it.

If I rent my home now rather than sell it, when I do sell it some time from now, how does capital gains tax work? Will I no longer qualify for a tax-free sale of my home?

Thanks in advance!:)

If you rent your home rather than selling it, you incur a deemed disposition at the fair market value of the property because the use of the property has changed. However, if this is your only property and you have never claimed the principal residence exemption before on any other property, you will not incur any capital gains based on this deemed disposition.

Make sure you file a subsection 45(2) election for this property when you are studying out east for grad school. This will provide you with an extra four years of principal residence exemption while you are renting out the property. The catch to a 45(2) election is you will not be able to claim CCA (depreciation) on the property when you are renting it out.

When you are done grad school and return to your property, again, because the use has changed, there will be another deemed disposition at the fair market value. You can claim principal residence exemption to reduce this capital gain. Because you filed a subsection 45(2) election, you should not incur any capital gains unless grad school has taken more than 5 years (1 + 4 years principal residence exemption).

To sum it up simply:
1. When you leave, there will be a deemed disposition possibly resulting in a capital gain but you are entitled to a principal residence exemption to reduce it to $0 (provided that you've never claimed this before).
2. File a subsection 45(2) election before or shortly after you move.
3. When you return, there's another deemed disposition and another possible capital gain, but since you filed a 45(2) election, the principal residence exemption should reduce it to $0 (unless you've been studying for more than 5 years).

Feel free to ask any questions if what I've tried to explain isn't clear or you're lost in the terminology and I'll try to explain in simpler terms :)

Edit: This is all assuming you own your "primary residence"... If you lease, there are no capital gains implications.

[jackboot]

Wow cadave - lots of good info in your post - but since this is my first time hearing some of these terms I'm still a bit confused! :lol:

If I understand correctly, the long and short of it is that as long as I return to my Calgary home within 4 years and re-claim the property as my primary residence again that I can sell it at any time without paying capital gains. Is this correct (assuming that I've filed the correct paperwork that you've mentioned)?

Does this situation get more complicated if I buy another home out East (Kingston, Ontario) to live in while I attend grad school? I understand that this home in Kingston can NOT be claimed as my primary residence as long as my Calgary home is. Is there a technical term to call this Kingston residence - something along the lines of a "non-primary residence"?

[cadave]

Wow cadave - lots of good info in your post - but since this is my first time hearing some of these terms I'm still a bit confused! :lol:

If I understand correctly, the long and short of it is that as long as I return to my Calgary home within 4 years and re-claim the property as my primary residence again that I can sell it at any time without paying capital gains. Is this correct (assuming that I've filed the correct paperwork that you've mentioned)?

Does this situation get more complicated if I buy another home out East (Kingston, Ontario) to live in while I attend grad school? I understand that this home in Kingston can NOT be claimed as my primary residence as long as my Calgary home is. Is there a technical term to call this Kingston residence - something along the lines of a "non-primary residence"?

You're not really re-claiming the property as your principal residence when you make the election.. you're electing to keep it as your principal residence during the time that you are away.

The way the principal residence exemption is calculated is [(1+Years Designated) / Years Owned], so you get a "free" year with the formula. This means as long as you return within 5 years, you will not pay any capital gains on your Calgary house (1+4 = 5).

Because the property in Calgary is elected to be your principal residence while you are away, you will have to pay full capital gains (if applicable) on the house you buy in Kingston (since you cannot designate this property as your principal residence while you have elected to keep your Calgary home your principal residence).

There's no such term as "non-primary residence" because the definition of "principal residence" is in the eyes of the owner. If you don't file an election, you can say that your primary residence in 2006-2007 and 2011 onwards is in Calgary and that your primary residence from 2008-2010 is in Kingston.

The best way to minimize your capital gains (and I know this is going to sound really technical, but try to follow)...

Canada Revenue Agency (CRA) permits taxpayers to file a retroactive 45(2) election. This means you can file the election AFTER you sell your Kingston home and you're done your graduate studies.

At the time you sell your Kingston residence, you need to compare:
1. The capital gain per year of ownership that you WOULD hypothetically have to pay if you sold your Calgary home
2. The capital gain payable on your Kingston home per year of ownership

Don't make the election if the 2 is bigger than 1 and designate Kingston your principal residence to reduce the capital gain to $0. Make the election if 1 is bigger than 2, thus deeming your Calgary residence as your principal residence while you are in Kingston.

CRA also has a page describing change in use of a principal residence to a rental property here:
http://www.cra-arc.gc.ca/tax/individuals/topics/income-tax/return/completing/reporting-income/lines101-170/127/residence/changes/changingall-e.html

"To make this election, attach to your return a letter signed by you. Describe the property and state that you want subsection 45(2) of the Income Tax Act to apply."

To claim the principal residence exemption, use Form T2091(IND), available at the bottom of that website.

The website does not discuss tax planning and how to minimize your capital gains when you have two principal residences (duh, it's CRA - they want as much money from you as possible...)

I hope that helps! Let me know if you have any more questions. :)

[jackboot]

Hey cadave - if you're still around, I've got another question about this 'old' thread!

I'm looking at homes to buy in Kingston right now and have a question about your advice here:

At the time you sell your Kingston residence, you need to compare:
1. The capital gain per year of ownership that you WOULD hypothetically have to pay if you sold your Calgary home
2. The capital gain payable on your Kingston home per year of ownership


Most of the capital gains for my Calgary residence occurred during the pre-delivery (construction) phase and 1st year of ownership - while I was actually residing in the home. For the next 2 years while I will not be residing in my Calgary home I don't expect nearly as much appreciation.

Is it possible to only pay capital gains tax on the appreciation for the 2-year period that I will be renting the property rather than residing in it?

Thanks again :)

[cadave]

Hey cadave - if you're still around, I've got another question about this 'old' thread!

I'm looking at homes to buy in Kingston right now and have a question about your advice here:

Most of the capital gains for my Calgary residence occurred during the pre-delivery (construction) phase and 1st year of ownership - while I was actually residing in the home. For the next 2 years while I will not be residing in my Calgary home I don't expect nearly as much appreciation.

Is it possible to only pay capital gains tax on the appreciation for the 2-year period that I will be renting the property rather than residing in it?

Thanks again :)

Right, but unless you've disposed of your home already or "deemed disposed" of it as I discussed above, you would not have paid tax on your capital gains for the years that you have resided in it yet... what we call "unrealized gains". At some point you will have to pay tax on the gains/appreciation during your pre-delivery phase and 1st year of ownership - it's just a matter of when you pay it.

I think I might be able to describe everything better to you personally... PM me if you have some sort of instant messenger and I'll try to help you out there specifically with your situation :)

[excel]

We have a new house built which will be completed next month and we can move in. Our current house we've been living in it as primary residence since we built it 14 years ago.

If we plan to sell this house next year, will our new house be our principal residence and how will the gains be calculated? I think BC assessment assessed the house at about $800 000 but market value can sell for around $950 000. Next year can probably sell for a bit more. If we make our new house the princial residence while our current house is worth $950 000 and next year we sell it for example $970 000 is it gains only on the difference of $20 000?


What if I continue to live here, but my parents move over to the new house can this current house still be considered primary residence and be exempt from capital gains?

Thanks for any input! :D