Investment property status change

[DRAGONRANA3]

Hi, early last year in 2020 our renter was evicted and my elderly parents decided to live in the investment property. They will be living there until this Spring. If i plan to sell it in the summer, how do i calculate the ACB for 2020 and 2021? How would i enter this in the ufile? Or do i enter my capital gains on the house by deferring to 2021 tax filing? Any help would be great.

[TheTaxSmith]

Hello DRAGONRANA3. Based on your question I assume you own the house and not your parents. The ACB will be the amount you paid for the place plus legal fees, transfer taxes and any improvements since ownership. The fact that your parents moved in will not change the ACB. Once you sell you will enter the Proceeds and the ACB as noted above and the software will determine the capital gain. If you claimed any CCA (deprecation) you will have a recapture of an amount between the ACB and the UCC and a capital gain for the difference between the Proceeds and the ACB. If however you sell for less than the lower of the ACB or UCC you could have a Terminal Loss.

[DRAGONRANA3]

23 hours ago, TheTaxSmith said:

Hello DRAGONRANA3. Based on your question I assume you own the house and not your parents. The ACB will be the amount you paid for the place plus legal fees, transfer taxes and any improvements since ownership. The fact that your parents moved in will not change the ACB. Once you sell you will enter the Proceeds and the ACB as noted above and the software will determine the capital gain. If you claimed any CCA (deprecation) you will have a recapture of an amount between the ACB and the UCC and a capital gain for the difference between the Proceeds and the ACB. If however you sell for less than the lower of the ACB or UCC you could have a Terminal Loss.

Yes, my wife and I own the house. Originally, it was being rented for a few years. The renters stopped paying rent and damaged the place and we had to evict them out.  Went through paralegal so was able to evict them, but my in-laws were to live there for 1 year or more before we can sell the property for this summer. And because the rental house was meant as an investment rental, the status changes from investment rental to principle in 2020. We have never claimed any CCA(depreciation) before, so that would not apply to us. In the CRA section 45(3) election says that it can be elected at the time of the change in use to defer the gain until a later date. Where in the Ufile software do I enter that for 2020? or do I enter that when I do my taxes for 2021 year? Sorry to ask this question, just a bit confused of whether 2020 is considered a deemed disposition of the property or do I declare it for next 2021 years taxes. Thanks.

[TheTaxSmith]

Hello DRAGONRANA3. Do you and your wife own a home separate from the investment property? As long as you are not living in the property and own another the "investment property" will not change to a principal residence, even if your parents are living there. There is no deemed disposition as the property remains an "investment property". If you moved in that would be different.

But that said in order to claim a change in use, without incurring a deemed disposition, you should get a market value appraisal at the time of the change to be used to determine your tax position down the road. Basically for 2020 you would not need to add anything to your tax report other than the legal fees, repairs and other associated costs. They will be expenses and do not add to the ACB.

On another point be careful about claiming expenses if you are not getting a fair market value rent from your parents. Renting to relatives below market value to create a loss is generally frowned upon by CRA.

 

[DRAGONRANA3]

10 hours ago, TheTaxSmith said:

Hello DRAGONRANA3. Do you and your wife own a home separate from the investment property? As long as you are not living in the property and own another the "investment property" will not change to a principal residence, even if your parents are living there. There is no deemed disposition as the property remains an "investment property". If you moved in that would be different.

But that said in order to claim a change in use, without incurring a deemed disposition, you should get a market value appraisal at the time of the change to be used to determine your tax position down the road. Basically for 2020 you would not need to add anything to your tax report other than the legal fees, repairs and other associated costs. They will be expenses and do not add to the ACB.

On another point be careful about claiming expenses if you are not getting a fair market value rent from your parents. Renting to relatives below market value to create a loss is generally frowned upon by CRA.

 

Yes, we own and live in a separate house away from the investment property. My inlaws are living in the investment property, but we pay all the bills and property taxes. They are not giving us rental money. We plan to sell it this summer. Thank you for the advice.

[Dragonrana]

Hi, so I was looking at the Government of Canada website, and it says that I have to report the change in use of the property. 

Does the new rule apply for deemed dispositions of property?

Yes. The new rules apply for deemed dispositions. A deemed disposition occurs when you are considered to have disposed of property, even though you did not actually sell it. For example, a deemed disposition will occur if there is a change in use of the property:

• You change all or part of your principal residence to a rental or business operation.
• You change your rental or business operation to a principal residence.

When you change the use of a property, you are generally considered to have sold the property at its fair market value and to have immediately reacquired the property for the same amount. You have to report the disposition (and designation) of your principal residence and/or the resulting capital gain or loss (in certain situations) in the year the change of use occurs.

Refer to the T4037, Capital Gains 2016, once available, for more information.

 

I am a little confused when you say I don't have to report it for 2020 tax year. Would this not be considered a deemed disposition? We had evicted the renter in March 2020, our in-law is living in the property, however they are not paying any rent. We are paying the expenses and mortgage out of pocket. We will be selling the property in a couple of months. Can you confirm if I need to indicate this as a deemed disposition on my 2020 tax form or wait to indicate it in my 2021 tax year? Thank you.