Capital Gains on partially rented units

[simuls]

Does anyone know how capital gains tax works on partially rented units? For example a house that you rent entirely is subject to capital gains when sold because it's an investment, but if you have a multiple suite house and live in one suite and rent another, are you still subject to capital gains? What if you have a 2 bedroom condo and rent one of the bedrooms out - is the whole suite now considered an investment or is it still your primary residence and no cg would apply? Or would cg only apply on the portion you're renting? I can't seem to find the answers on the cra site. Thanks in advance.

 

[adeel]

Does anyone know how capital gains tax works on partially rented units? For example a house that you rent entirely is subject to capital gains when sold because it's an investment, but if you have a multiple suite house and live in one suite and rent another, are you still subject to capital gains? What if you have a 2 bedroom condo and rent one of the bedrooms out - is the whole suite now considered an investment or is it still your primary residence and no cg would apply? Or would cg only apply on the portion you're renting? I can't seem to find the answers on the cra site. Thanks in advance.

When you convert a property from something that is principal residence to a rental, you are from a tax perspective making a deemed disposition. You essentially sell the residence and buy it back as a rental. In all cases where you sell something you would be taxed on the capital gain. However, depending on how long you lived in/owned the principal residence, likely all of that capital gain would be tax free at the time of changing the use of the property.

When you rent out a portion of your place, you are considered to have changed the use of that part of the home from personal-use to rental property. You are deemed to dispose the rental part of the home. However, your principal residence exemption would avoid that part of the capital gains taxes. However, when you finally sell the house in entirety, you MIGHT have to report a capital gain on the portion of your place that is rented out.

HOWEVER, If all of the following conditions are met, you will not be considered to have a change in use:
- the part of the home used for rental purposes is small in relation to the size of the whole property,
- you do not make any structural changes to the property to make it more suitable for rental purposes, and
- you do not claim any capital cost allowance on the part you are using for rental purposes.

I dont know if there are any guidelines on what is small in relation to the whole size, but offhand I would say anything more than 20% is too much to claim a full exemption.

Hope that made sense!

 

[simuls]

Awesome answer thanks! So, if I rent out a 117 sq ft room in a 1050 sq ft condo and I stay residing there, I should be ok as long as I don't upgrade the room, etc.

 

[cdr108]

Awesome answer thanks! So, if I rent out a 117 sq ft room in a 1050 sq ft condo and I stay residing there, I should be ok as long as I don't upgrade the room, etc.

if you lived there, CRA wouldnt know you rented out a room unless you declared the income and expenses related to it.

 

[adeel]

Awesome answer thanks! So, if I rent out a 117 sq ft room in a 1050 sq ft condo and I stay residing there, I should be ok as long as I don't upgrade the room, etc.

No problem. As I said I don't know that there is a certain threshold, but I think that for your scenario you should be fine.

if you lived there, CRA wouldnt know you rented out a room unless you declared the income and expenses related to it.

While this is a valid point, if they ever decide to audit Simuls they could decide to look into his bank accounts (which I believe the CRA is in their rights to do so) and ask for an explanation of a regular/constant amount (as they would expect that to reflect income of some kind).

From a tax perspective, the potential tax savings of not declaring is not worth the risk of being caught/punished.

Also, one can claim costs of the home, (proportionate share of interest, condo fee, property taxes, repairs etc) againt rental income, so its possible that you could create a loss that reduces your taxes.

 

[cdr108]

No problem. As I said I don't know that there is a certain threshold, but I think that for your scenario you should be fine.



While this is a valid point, if they ever decide to audit Simuls they could decide to look into his bank accounts (which I believe the CRA is in their rights to do so) and ask for an explanation of a regular/constant amount (as they would expect that to reflect income of some kind).

From a tax perspective, the potential tax savings of not declaring is not worth the risk of being caught/punished.

Also, one can claim costs of the home, (proportionate share of interest, condo fee, property taxes, repairs etc) againt rental income, so its possible that you could create a loss that reduces your taxes.

i agree with you but if simuls rented out just 117 SF and charged ~$250/m, the amount of administration work wouldn't be worth it ...

chances are s/he will be sharing a 2 bedroom unit and be charging ~$1000 so it's more than just 117SF, although that may be the measurements of the bedroom itself.

 

[adeel]

i agree with you but if simuls rented out just 117 SF and charged ~$250/m, the amount of administration work wouldn't be worth it ...

chances are s/he will be sharing a 2 bedroom unit and be charging ~$1000 so it's more than just 117SF, although that may be the measurements of the bedroom itself.

$1000/month seems like its a bit inflated for sharing.

Im not sure what you mean by admin work...if simuls has an accountant preparing their taxes its no issue

If not, its really not all that complicated...less than 15 minutes of work to prepare the additional form needed if doing by hand and even less by computer.

 

[simuls]

Thanks for all the responses!

The exact situation would be to rent out my 2nd bedroom in a 2b+den PH condo. I already have a renter lined up who will pay me $1200/month. I will need to claim this as rental income because he will be claiming it as an expense (he lives in another city and will only use the room about 6-8 nights/month, so it's still cheaper and more comfortable than a hotel). He'll then pay me back whatever I pay in taxes out of his tax savings (we're close). In this scenario we figure he helps me out and still ends up paying less than renting a hotel for 9 nights/month (at $250/night incl.taxes,etc).

Hypothetically, might it make even more sense to charge more (say $2000) in terms of the tax benefits to both of us as I'm in a low tax bracket and he's in the highest. Would this be legal?

 

[northstar]

Hypothetically, might it make even more sense to charge more (say $2000) in terms of the tax benefits to both of us as I'm in a low tax bracket and he's in the highest. Would this be legal?

No, that would not be legal. You'd have to charge "fair-market-rent". While fair market rent can be open to interpretation (+/- 10% or so), the CRA would recognize a situation in which you are overcharging or undercharging rent in order to avoid taxes.

While probably they would simply levy a fine, one can never be sure. Look at what happened to old Leona Helmsley and even Conrad Black when they tried various schemes towards tax avoidance.

 

[simuls]

Thanks for the headsup Northstar! $1200 is fair market rent. So $1200 it'll be. I also assume that if I claim it is just for the, roughly, 10% sq ft of the room, then I should also only claim 10% of the expenses at filing time in order to avoid any red flags.

 

[adeel]

Thanks for the headsup Northstar! $1200 is fair market rent. So $1200 it'll be. I also assume that if I claim it is just for the, roughly, 10% sq ft of the room, then I should also only claim 10% of the expenses at filing time in order to avoid any red flags.

You arent allowed to claim anything greater than that, so that is correct.

 

[JayBee]

Thanks for all the responses!

The exact situation would be to rent out my 2nd bedroom in a 2b+den PH condo. I already have a renter lined up who will pay me $1200/month. I will need to claim this as rental income because he will be claiming it as an expense (he lives in another city and will only use the room about 6-8 nights/month, so it's still cheaper and more comfortable than a hotel). He'll then pay me back whatever I pay in taxes out of his tax savings (we're close). In this scenario we figure he helps me out and still ends up paying less than renting a hotel for 9 nights/month (at $250/night incl.taxes,etc).

Hypothetically, might it make even more sense to charge more (say $2000) in terms of the tax benefits to both of us as I'm in a low tax bracket and he's in the highest. Would this be legal?

That's a great set up you have there.

 

[adeel]

That's a great set up you have there.

Indeed I wish I could get in on something like that.

 

[simuls]

'tis is sweet deal indeed

 

[ponyboy]

thanks for starting this discussion. I'm a little unclear about the terminology above, so forgive me if you answered it above..

Getting back to the issue of capital gains on a rental property, if it was my principal residence for 10 years, and then I rented it out for the next 10 years before selling, would I be able to reduce my capital gains taxes upon selling for the time it was my principal residence? What about the opposite scenario--renting it out for the first 10 years, and then living in it for the next 10 years before selling? Seems unfair to not get credit for the time it was PR.