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USTaxAdvising
USTaxAdvising, CPA
Category: Tax
Satisfied Customers: 1065
Experience:  US Taxation specialist.
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We currently own two homes. One we have lived in for almost

Resolved Question:

We currently own two homes. One we have lived in for almost 17 years and it has a mortgage. Earlier this year, we purchased another home with cash and are renovating it. We are considering moving into the new home and renting out our old one. If we live in the new home, are we able to claim the PRE after we sell it? Our idea was to live in the new home for a trial period of about a year. After a year, if it's not a good fit for our family we would list it for sale and we would move back into our old home. In the meantime, we would use rental income to pay the existing mortgage on our old home. Is this a feasible plan? Is there a tax advantage to this? Thank you for your help.

Submitted: 8 months ago.
Category: Tax
Expert:  USTaxAdvising replied 8 months ago.

Hello,

 

I can assist you with your personal residence question today.

 

If we live in the new home, are we able to claim the PRE after we sell it? - Yes and no. When the property changes from personal-use to income-producing, it is considered a deemed disposition and can result in a capital gain. This is calculated by deducting the adjusted cost base of the property from the fair market value at the time of change in use. Any gain resulting from this deemed disposition can be eliminated by the PRE, if the property has always been the taxpayer's principal residence. If the property has been the principal residence for only a portion of the time it has been owned, then the gain could still be partially eliminated by the principal residence exemption. You could also defer recognition of the resulting capital gain (if any) by electing under subsection 45(2) of the Income Tax Act to be deemed not to have made the change in use. This election cannot be made if there is only a partial change in use of the property. The election should be made when the change in use happens. Once this election has been made, the property can still qualify as your principal residence for up to 4 taxation years, even if the property is not inhabited by you during those years. However, you must still be a resident or deemed resident of Canada during those years in order to designate the property as the principal residence.

 

I would think this would be a feasible plan for you. As outlined above you could rent the home and defer the gain and still qualify the home as your principal residence four years later.

 

Here are some good links on the topic:

http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/rprtng-ncm/lns101-170/127/rsdnc/menu-eng.html

http://www.taxtips.ca/filing/principalresidence.htm

http://www.taxtips.ca/personaltax/propertyrental/changeinuse.htm

 

I hope this provides the answers your were looking for, if not please let me know where I can provide additional clarity.

 

Best regards,

Customer: replied 8 months ago.


Hi thanks for the info and for the website provided. They were helpful - as were you. Smile I just want to clarify...to make sure I understand what you are saying.


 


If we keep two houses...live in the newly renovated one as our principal residence - then sell it in a year or so, we can claim the PRE on that house.


 


Our previous house (we are currently living in), we can rent it out and only have to report as income the rent minus expenses (mortgage, insurance, property tax etc.). We can then move back into that house after the other one is sold. It now becomes our personal residence again.


 


Thereby, we avoid paying taxes on the profit of the house we bought, renovated, lived in, then sold. Thanks for your time. Smile


 

Expert:  USTaxAdvising replied 8 months ago.

Hello Monique,

 

If we keep two houses...live in the newly renovated one as our principal residence - then sell it in a year or so, we can claim the PRE on that house. - Correct, assuming it was your principal residence for the entire period that you owned it.

 

Our previous house (we are currently living in), we can rent it out and only have to report as income the rent minus expenses (mortgage, insurance, property tax etc.). We can then move back into that house after the other one is sold. It now becomes our personal residence again. - This sounds correct yes. Smile

 

Thereby, we avoid paying taxes on the profit of the house we bought, renovated, lived in, then sold. - Yes this appears correct, as long as the home is your principle residence it would qualify for the PRE.

 

Glad I could help.

 

Best regards,

 

USTaxAdvising, CPA
Category: Tax
Satisfied Customers: 1065
Experience: US Taxation specialist.
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