personal house to rental when married and now maybe

My question is: Canadian-specific
QUESTION: Hi, I have a rental house now that I bought in 1995 with the sole
intention of living in for some time, I rented out the basement suite while
living upstairs.  I had the house appraised shortly before I got married in
1999 because it was not going to be my principal residence.  I separated in
2004, I live in another house that is in my husband and my name which will
be transferred over to just me when the divorce is final.  I am thinking
about selling the rental house to my upstairs tenants.  Right now I do not
have a lot of taxable income, would now be the time to sell? (after the
divorce is final)  How does that affect capital gains?  I have been advised
to take some equity out of the house and buy more properties but don't know
if I want to responsibility of a rental.  The house will be paid off in 5
years and the house has gone up in value $100,000 or more. Thanks.
david ingram replies:
Under Section 45(2) of the Canadian Income Tax Act you had the opportunity
to continue to claim your former house as your principal residence for the
years 1999,  2000,  2001,  2002, and 2003 by filing an election.  The
election should have been filed as part of each return for those years but
late elections are generally accepted..
Or, you could claim your share of the house you shared with your husband as
your tax free residence.  I would suggest that you would make the decision
based upon which property increased the most for the years 1999 to 2003 and
remember that it is "your share" of the matrimonial home that matters.
Therefore, if the rental house went up $150,000 in that period and the
matrimonial home went up $200,000, it would make more sense to designate the
rental as your home because that gets YOU $150,000 tax free even though it
means that in the future, you will have to pay tax on $100,000 of the profit
on the house you are living in (your share is half of the $200,000 - the
other half is your husband's). However, a married couple can only have ONE
house as a tax free house at the same time.  IF you claimed the rental tax
free, it means that your husband also owes tax on his $100,000 when he turns
his half over to you.
He would not like that so logically if you sell, the years 1995 to 1999 are
tax free and you owe tax on anything after that.  However, the form T2091
pro-rates the profit equally over the years.
The following Q & A was published a couple of weeks ago and has a bit of
relevancy to your situation.
My question is: Canadian-specific
QUESTION: We rented out our house for six months until we moved back into
it. Upon moving back in I had to replace a couple of items including the
washer and a sump pump. Are these items tax deductible even though I did not
replace them while the unit was rented out?
david ingram replies:
The answer is no and is a real problem for landlords in your position.
You can rent your place out for any length of time while you are gone and
come back to more repairs to bring it back to your standards than the rent
However, anything you spend after the rent is considered a capital or
personal expense and not deductible against current income since it was not
expended to earn current (i.e. rental) income.
If you are in the position where the house would be taxable for capital
gains, then the amounts could be considered deductible against the future
capital gains and you would accomplish this by keeping a running total of
what you paid for the house, what it was worth when you moved out and rented
it out and what you added to the cost of the house after renting it out.
Form T2091 is the Canadian form filled out to decide if you are taxable on
the house or not.
When you moved out of the house, you converted it to a business property.
When you moved it back in, you converted it back to a personal residence.
Believe it or not, if the house went up in value $10,000 in the six months
you were out of it, you owe capital gains tax on $5,000 unless you file a
declaration under section 45(2) of the tax act.
The declaration allows you to move out for up to 4 years without incurring
capital gains tax by filing a statement with your T776 rental statement.
The statement would say:  "I hereby elect to declare the building at xxx
your street, your town, your province, Canada as my principal residence even
though I do not ordinarily inhabit it."  This statement is good forever if
you are transferred out of your area and live in a rented place in the other
city and stay working for the same employer.
It is good for "four" years if you just want to try and live somewhere else
for a while.
It does NOT apply if you get married and move in to your spouse's home as an
example.  In this case, you and your new spouse can claim your or your
spouse's home tax free but not both.
So, when you file your 2005 return and the rental form T776 to report the
rent, make sure you make the 45(2) election above.
If you want to follow up with a phone call, remember that I charge for phone
calls to my office BUT
Answers to this and other similar  questions can be obtained free on Air
every Sunday morning.
Every Sunday at 9:00 AM on 600AM in Vancouver, I, david ingram am a
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