Selling a House - Capital Gains Tax

[Wayward]

Hello Folks!

I'm quite alone in the world and would really appreciate any insight or guidance you may be able to offer.

Here goes, I bought a home 11 years ago in North Winnipeg and it has been rented out for about 7 of those years, now I'm thinking of selling.

I had bought the house as an investment with the idea of selling it when I'm older so that I would have some funds to live from, I'm doing charity work in India for over 10 years and have always lived on very little.

As crazy as this sounds, I came to to know about something called capital gains tax and I'm concerned about having to pay a large portion of a sale towards capital gains tax. This is the only property I own and it's not worth very much... maybe 300k.

I may have come across some info that seemed to indicate that it could be smart for me to return to the house and live in it for some time before selling it in order to mitigate the capital gains tax I would have to pay but I have no idea about this.

Can some kind and insightful soul please lend some much needed perspective? I'd really appreciate it

[wave46]

Originally Posted by Wayward

Hello Folks!

I'm quite alone in the world and would really appreciate any insight or guidance you may be able to offer.

Here goes, I bought a home 11 years ago in North Winnipeg and it has been rented out for about 7 of those years, now I'm thinking of selling.

I had bought the house as an investment with the idea of selling it when I'm older so that I would have some funds to live from, I'm doing charity work in India for over 10 years and have always lived on very little.

As crazy as this sounds, I came to to know about something called capital gains tax and I'm concerned about having to pay a large portion of a sale towards capital gains tax. This is the only property I own and it's not worth very much... maybe 250k.

I may have come across some info that seemed to indicate that it could be smart for me to return to the house and live in it for some time before selling it in order to mitigate the capital gains tax I would have to pay but I have no idea about this.

Can some kind and insightful soul please lend some much needed perspective? I'd really appreciate it

As per the CRA:

http://www.cra-arc.gc.ca/tx/ndvdls/t...ht/hw-eng.html

Basically if it is the only home that you own and you live in it, it is exempt from capital gains tax upon sale.

Now, you'd likely have to prove that you resided in it for some period of time before sale, so having some proof of that before you sell it is paramount. This might include having a driver's licence listing that as your address, having correspondence from the CRA/other government entities sent there, etc.

This is more important as the CRA has started to clamp down on foreign speculators (not in the Winnipeg market per se) and proof that you resided there might be investigated.

[Wayward]

Hi Wave46, thank you very much for jumping in with your info.

I return to the house every few years to file my taxes and facilitate new renters so I have some tax assessments, drivers licence type of documents.

As I may have heard it, although I'm really an unclear on this and this is where i could really use some info: when the tenant files their taxes they list where they live. And so it stands to reason that the RC must have that on file and can/ will somehow charge capital gains tax for the years the house was rented.

Does this theory hold any water?

[wave46]

Originally Posted by Wayward

Hi Wave46, thank you very much for jumping in with your info.

I return to the house every few years to file my taxes and facilitate new renters so I have some tax assessments, drivers licence type of documents.

As I may have heard it, although I'm really an unclear on this and this is where i could really use some info: when the tenant files their taxes they list where they live. And so it stands to reason that the RC must have that on file and can/ will somehow charge capital gains tax for the years the house was rented.

Does this theory hold any water?

That would be....debatable.

I'm not a tax lawyer, nor do I specialize in tax law. I'm just some guy on the internet, so professional advice would be recommended, especially if you're talking about a significant sum of tax involved.

That disclaimer having said, I'd imagine the CRA would look at the situation itself. They'd likely not pursue the case if you resided there for a period of time (say, 1 yr.), even though it was previously a rental unit. You'd just be effectively taking back your home and the rental income you had earned in the time span before has been taxed already.

However, if the CRA thought you were trying to scam them, they might have a case. If you change your primary residence 12 days before the closing sale date and claim it as your primary residence, they might take issue with that.

[Wayward]

Thanks again Wave46. In general, everything you've mentioned makes good sense, especially the part about talking to a tax specialist... so I'll put that on the horizon.

In the meantime, I'll keep an eye on this thread in the event that anyone else has anything relevant to add.

[whatnext]

Originally Posted by Wayward

Hi Wave46, thank you very much for jumping in with your info.

I return to the house every few years to file my taxes and facilitate new renters so I have some tax assessments, drivers licence type of documents.

As I may have heard it, although I'm really an unclear on this and this is where i could really use some info: when the tenant files their taxes they list where they live. And so it stands to reason that the RC must have that on file and can/ will somehow charge capital gains tax for the years the house was rented.

Does this theory hold any water?

The only property exempt from capital gains is your principle residence. If you're renting the house completely, it is not your principal residence. In the last round of attempts to cool the housing market, one of the things singled out by the CRA was cracking down on those fraudulently claiming an investment property as principle residence. I believe the new tax return will have a question as to that effect. So be aware that you would be taking your chances, and you're just rolling the dice on how likely there would be an audit.

More people are likely to get an unpleasant shock when they realize that if they have a secondary suite, that portion of the house value will not be exempt from capital gains.

[WhipperSnapper]

How much did you pay for the property and how much are you planning on selling it for? You may be worrying over nothing.

[Wayward]

@ WhipperSnapper

I bought the house in Sept 2006 for 100k and lived in it till June 2008.

Then rented it from June 2008 to August 2012 (4 years).

Having returned to the house in August 2012, I filed 4 years of taxes claiming the rent as income.

Then rented it again from June 2013 till June 2017.

2017 Market value for the house should be something like 300k.

Any thoughts?

[WhipperSnapper]

No, I definitely don't have any thoughts on it. Your situation is very complex compared to mine. I'd definitely seek advice as they will know all the ways to reduce your taxable amount. Anyways, capital gains is more of an annoyance (sharing wealth) than something to be too concerned over especially at your income level.

[middeljohn]

I was under the impression that it's pretty cut and dry. If the house was ever your primary residence for at least one year during your ownership then you're exempt from capital gains tax.

[240glt]

Interesting discussion. I am in the same position as the OP, bought a house in '04 to live in, bought another house in '13 and rented the old one out (but the new house is not in my name) We're planning on getting out of this town in almost exactly eight years, my plan was to just leave it vacant and transfer all my bills back to the old house for a period of time before I sold it.

The most solid advice administered here so far is to talk to an accountant

[1overcosc]

Originally Posted by Wayward

As I may have heard it, although I'm really an unclear on this and this is where i could really use some info: when the tenant files their taxes they list where they live. And so it stands to reason that the RC must have that on file and can/ will somehow charge capital gains tax for the years the house was rented.

That might not necessarily be true. It's possible for tenants to have the same address as their landlord (ie. if you rent out spare rooms in your house), so just because tenants have filed from that address doesn't necessarily mean it has never been the landlord's "primary residence" either.

[Wayward]

Originally Posted by 1overcosc

That might not necessarily be true. It's possible for tenants to have the same address as their landlord (ie. if you rent out spare rooms in your house), so just because tenants have filed from that address doesn't necessarily mean it has never been the landlord's "primary residence" either.

Very good point 1overcosc. So now what?

[Taeolas]

Originally Posted by Wayward

Very good point 1overcosc. So now what?

Now you contact a tax specialist with your paperwork to sort it out.

[trunk]

I too will echo the advice to talk to an accountant. The tax savings may very well likely be more than the fee you'll pay to them for some sound advice!

But I'll throw my advice in here as well:

You are entitled to claim an exemption on all capital gains resulting from the sale of a house that is your principal residence. You are able to declare a house as your principal residence for any given year if you own said house and have ordinarily inhabited it at some point during that year. If you owned the house for more years than you are able to declare it as your principal residence, a formula is used to pro-rate the capital gain exemption for the number of years it was your principal residence.

Since in your case, there has been a change in use from principal residence to an income producing property, and vice versa, you have two options available:

1) Elect to not change the use of the property. This will allow you to designate the property as your principal residence for an additional four years while it was actually being rented out, thus increasing your available principal residence exemption, and will allow you to defer the capital gain until the property is actually sold. I believe this election can be filed retroactively. However, this option also means that you cannot claim capital cost allowance (CCA) against the income earned from that property.

2) If you do not make the above election, you will be deemed to have disposed of the property each time it transfers from principal residence to an income producing property, and vice versa. This means you'll be liable for capital gains resulting from those deemed dispositions. Depending on the fair market value of the house on the disposition dates (June 2008, August 2012, June 2017), combined with your ability to claim CCA against rental income earned on the property, and your principal residence exemption still available to you , this may be the better option, tax wise.

If you were required to move by your employer, an extended designation might also be available to you which would allow you to designate the property as your principal residence beyond the four year limit in option 1.

Also keep in mind, as you might be well aware, that capital gains are only included in income at 50%, i.e. selling your house for $300,000 that you purchased for $100,000 would result in a capital gain of $200,000, but only $100,000 of that would be taxed.

Forgive me if this explanation has been dense and hard to follow, but hopefully its a bit of idea as to what you could be dealing with.

[Wayward]

Wow Trunk... very well said!

Huge thank you for taking a moment to put this down in the way that you have. Really.

As far as it being dense... yes absolutely... on first pass. But I will go over this many times until it settles in. At least that way I know what I'll be facing when I'm back in Canada and stepping in front of an accountant.

And to you Trunk and everyone else here, I just have to say, I am extremely grateful that I come from a culture that is incredibly kind and helpful.
Thank you!