Moving into rental house - David Ingram gives expert income tax & immigration help to non-resident Americans & Cana

My question is: Canadian-specific
QUESTION: My father passed away about a year ago, his house was
left to myself and my brothers. I am buying out the others
and will be fixing up the house to rent it out eventually. I
presently own the house i live in but consider down the
road i will sell my house and move into my fathers, i am
wondering how the rental period will effect things if i
eventually sell that house given that i live in it for a year
or more and assuming that it increases in value.I also
wonder if there is anything else i should be aware of in
the purchasing of my fathers house my share of the estate
is ten percent.thanks for any advice in this matter.
david ingram replies:
I could spend a day answering this and not cover everything.
However, if you move into your father's house after renting it out, there is
a deemed disposition of the rental property and you owe capital gains tax on
the next tax return you file.  You CAN make an election to defer the tax
under section 45(3) of the act.  Make sure you keep track of every cent you
put into the house as it adds to the ACB (adjusted cost base) and means that
you will pay less capital gains tax in the future.
Living in the rental house makes any increase in value the year you move in
tax free, but all the rest is taxable.
This older Q & A might/should help.
taxman at Please see bottom of message if you wish to unsubscribe.
My_question_is: Canadian-specific
Subject:        Principle Residence Question
Expert:         taxman at
Date:           Wednesday August 09, 2006
Time:           10:31 PM -0700
Hi.  My mom has lived and owned her home for over 30 years.  I believe this
is her principle residence and she would not have to pay taxes on this home
if it were sold.
She also owns a duplex (2 suites) which she gets rental income.  She was
wondering what the income tax implication would be for her to sell her
current principle residence (above) and move into one of the suites in the
duplex.  If she sells her current principle residence and moves into her
duplex...does the duplex now become her principle residence?  If so, when
she sells the duplex (to say, be admitted to a nursing home), will there be
any tax implications on the sale of her duplex.
Any help you could provide us would be most helpful.  Thank you.
david ingram replies:
When she sells the house, it is tax free.
When she converts the rental duplex to a principal or personal residence
there is a deemed sale under the income tax act and she owes the same tax as
if she sold it to a stranger.  The profit and tax is calculated on the fair
market value the day she moves in. 50% of the profit will go on line 127 of
her T1-General.
She also has to take any depreciation (Capital Cost Alowance) she has
over the years and report it as income on Schedule T776 and then line 126.
The good news is that if she chooses to delay paying the tax on any capital
gain, she can put the line 127 figure on to line 256 as a deduction by
making an election to defer paying the tax until the actual sale under
section 45(3) of the income tax Act.
The bad news is that she can NOT defer repaying the tax on any depreciation
claimed.  The good news is that she will have lots of money to do so because
she sold the house she lived in for 30 years tax free.
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