Rental Property Investor · Toronto, ON · Member since 2018 · 22 posts · 5 votes
Hi everyone I am new to real estate investment. I have a question on tax exemption.
If I buy a property for $700k and live there as a primary residence, but I rent out the basement for $1500 per month. When I sell my place in five year, say the price appreciates to $1million, do I get capital gain tax exemption of that $300k appreciation?
@Amber C.
Hello,
I recently experienced this myself. Had a principal residence, which also had rental units. Upon sale, my tax accountant advised me that I would have to pay capital gains on a portion of the sale price. One option of avoiding capital gains is to rent to family memebers. There is also a form that your accountant should know about, which exempts you from capital gains, if you are only renting for short term, or part-time. I may not have fully understood the exact terms of the conditions mentioned above. I can refer you to my accountant for further clarification. Hope this helps.
Only the portion you live in would be exempt. The other portion you rent out would be excluded. One way around that would be to use a 1031 exchange. It gets a little complicated at that point. You'll want to speak with a tax or legal professional before doing anything.
@Amber C. I'd refer to the tax code and your CPA for that answer. Here's the link to the IRS website covering that topic. https://www.irs.gov/taxtopics/tc701
@Amber C.
Hello,
I recently experienced this myself. Had a principal residence, which also had rental units. Upon sale, my tax accountant advised me that I would have to pay capital gains on a portion of the sale price. One option of avoiding capital gains is to rent to family memebers. There is also a form that your accountant should know about, which exempts you from capital gains, if you are only renting for short term, or part-time. I may not have fully understood the exact terms of the conditions mentioned above. I can refer you to my accountant for further clarification. Hope this helps.
Alex, you're right that 1031 does not apply in Canada. What is more important in your situation, the CRA has specific requirements.
@Amber C. the article that Kenneth gave sums it up. But also, first, less than 51% has to be used for rental. Second, you must not have made any "structural changes" to make the rental portion (ie. you buy a house, build a side entrance, CRA will not consider it as portion of primary residence anymore).
Assuming you meet those two criteria, you can still claim the principal residence exemption. So important thing is that when you are filling the Form 776 for your tax return, that your "personal portion" is 51% or greater, or it'll just be a percentage that is exempt.
Unfortunately Canada (unlike many countries) does not have a 1031 exchange-type option or any other deferral methods for capital gains, but an unlimited exemption in terms of amount for primary residence is still a good thing.