Disposition of Rental Property in BC -T2091 - 45(2)

Subject:        Disposition of Rental Property in BC
Expert:         taxman@centa.com
Date:           Tuesday January 22, 2008
Time:           05:15 PM -0000

QUESTION:

Good Day!  A friend and I purchased a condo in 1994 for 115K each contributing to the down payment and mortgage - however in 1995 I bought him out and I had sole title. In 1996 I rented this condo out, and have done so up until July of 2007 whereupon I sold it for appro 180k.  

My question is:  I understand that when I rented it out in 1996, there was a FMV that should have been recognized and some sort of form or election that I should have filled out?  I did not do this. What are the ramifcations of this?  I have been declaring the rental income and expenses all this time. 

Second question is with respect to the capital gain - do I have to come up with a realistic market value as of 1996 and what if any effect would the dissolved personal partnerhsip have on this?

I assume my calc for captial gains would be:  180k less 12k real estate fees less 120k (1996 value?) = 48k profit declared - taxed at 50% = 24K. The 24k is taxed at my marginal rate (30%) so I would owe approx 7200.00? Is that correct?

Thanks so much!!!


-------------------------------------------------
david ingram replies:

Your calculation is correct.  The election you mentioned is under Section 45(2) of the Tax Act.

Usually the CRA will accept a late filed election but it would only be of benefit if you did not buy another property for five years after renting it out.

You will have to file form 2091 to calculte the lower tax  if you did not buy another house.  If, for instance, you have rented all this tuime and are now selling to buy again with a new partner or something of the kind then you should file a late 45(2) election.  Note that you can NOT file a 45(2) election if you claimed Capital Cost allowance (CCA or depreciation) on the rental.

Note, You can claim the 45(2) ELECTION IF YOU BOUGHT ANOTHER PROPERTY.  HOWEVER, that would mean that you would owe capital gains tax on the house you actually lived in for the extra five years you calimed the first one tax free.  If the new one went up a millillion and the old one $60,000, you would not do that.  However, if you happended to have bought a leaky condo for the second one, it would likley be to your benefit to claim the first one tax free for the exta 5 years as shownon form 2091.

Form T2091  http://www.cra-arc.gc.ca/E/pbg/tf/t2091_ind/t2091-07e.pdf

Worksheet for form T2091 http://www.cra-arc.gc.ca/E/pbg/tf/t2091_ind_-ws/t2091-ind-ws-05e.pdf

---------------------------------------------------------------
>>
>> QUESTION:
>>
>> Hi, 
>>
>> Last year, we rented out our condo in Vancouver.  The
>> plan then was to have the rent cover our mortgage
>> payments for the 12 months that we would be away.  A
>> short term solution.
>>
>> Now, we are planning to be away from BC for a longer
>> period of time (approx. 2 years) and wish to sell the condo
>> in the middle of the year, as we are unable to rent the
>> condo for any longer due to strata council by laws.
>>
>> 1) If we sell the condo when there has been a tenant living
>> in it for 12 months, will we pay capital gains?
>>
>> 2) What are our best options to avoid paying this tax?
>>
>> 3) If capital gains would be owed, for how long would we
>> have to make the unit our principal residence again before
>> we can sell it and not pay CGT?
>>  
>> Thank you,
 _________________________________________________________________
   
david ingram replies:
 
If you filed a section 45(2) election with your first year's rental, you 
can rent the condo out for up to 4 years (plus 1 in the calculation) 
without incurring capital gains tax if you have not bought another 
residence that you are lioving in.
 See Below:
 
My question is: Canadian-specific

QUESTION: Dear Mr. Ingram,
I bought a house in the December of year 2000, lived there till the end of December 2000 (3 weeks) and started to rent it out on January 1, 2001. I filed the election 45(2) to claim the house as my primary residence for years 2001, 2002, 2003 and will do it for 2004.
I do not claim a depreciation for those years.
I want to sell the house now. Do I need to move in house first in order to avoid the payment of the capital gain taxes. For how long I have to stay there to be eligible for not paying the capital gain taxes on sold house if I need to move in.

Thank you in advance for you help,
----------------------------------------------------------
david ingram replies: 
 
First I am going to repeat your old question from last July and my answer.
 
My question is: Canadian-specific

QUESTION: Hi, David!
I would like to know is it possible to use the election under the section 45(2) again if the old house is sold and the new one is bought. Can it be used unlimited number of times by the condition that it is used for each house only once.

Thank you  
---------------------------------------------------------------------------
David Ingram replies:
 
Section 45(2) is intended to allow people to try something out.  This means that if you move to a rented condo for a couple of years and rent your house out, you can move back into the house without suffering a capital gains tax under section 45(2).
 
Since it was passed on June 17, 1972, (32 years ago now) I have never seen it used more than twice by one person.
 
Does not mean it has not been used more than twice in thirty years, it just means it is unlikely.
 
There is no numeric restriction but if you are moving in and out of houses, the CRA will treat you as a trader and tax you at full rates.
 
----------------------------------------------------------
Now, to answer this question.  Section 45(2) is NOT something you can plan to use.  In other words, your living in the house for three weeks and renting it out and filing a section 45(2) election does NOT make it tax free if you bought the house to rent and not to live in as your personal principal residence.
 
Your question indicates to me that you are trying to beat the system and did not buy the first house to live in and unless you can show the tax office that you moved every stick of furniture in and really intended to live there, the CRA will not allow it to be sold tax free.
 
This year, a new policy of the CRA is that they wish form T2091 to be filed with every tax return where a personal house was sold during the year.
 
If it was your residence and you genuinely intended to live there and were transferred of suddenly got married or could not stand your neighbour or lost your driver's licence or suffered some other disaster that caused you to "HAVE TO" move suddenly, filing section 45(2) will make it tax free provided you did not also own another house that you did live in.   If you did own another house that you actually lived in, claiming the house you have filed the 45(2) election for as tax free, will MAKE THE HOUSE YOU ACTUALLY LIVED IN TAXABLE.
 
If you have a genuine 45(2) election, you do not need to move back in.  If it is not a genuine 45(2), moving back in will TRIGGER a tax bill as you move in.
 
You need a consultation with someone who knows the rules before you make a mistake. I am available in person or by phone at a fee of $350.00 minimum for an hour but not until November now.
 
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