Blurb: When assessing the tax implications of buying or owning real estate, the first thing that comes to mind is property taxes. But owning your own home, cottage or rental property also can bring important income tax consequences.

The income tax implications of owing a home or rental property
By Peter Diekmeyer o Bankrate.com

With tax season just around the corner, now is an opportune time to assess the tax implications of owning real estate. Whether you own your own home, cottage or rental property, or are thinking of buying or selling, it pays to be informed about how these moves might affect your tax position.

Homes and principal residences
Owning you own home is a big plus on the tax front, because unlike most other forms of investment, capital gains on your "principal residence," are not subject to income tax when the property is sold or transferred.

CCRA sets out detailed rules as to what qualifies as a principal residence, but in most cases it is the house, condominium, mobile home, trailer or boat that you regularly live in a designated year.

Secondary residences or cottages
The catch is that since 1982 only one home per couple may be designated as a principal residence. Any other property, (typically a cottage) must be designated as a secondary residence, and will be subject to capital gains tax on the profits when it is sold or transferred.

Rental property
When most people think of rental property they picture huge apartment blocks administered by giant corporations. Nothing could be further from the truth.

The vast majority of rental buildings are so-called "plex" buildings; duplexes, triplexes and so on, which are typically owned by sole-proprietor landlords who often occupy one of the units and rent out the others.

Louis Robert, a Montreal-based financial planner, with Centre Financier Carrefour, helps dozens of local landlords to complete their tax returns each year.

According to Robert, many landlords find that taking care of the accounting, filing the paperwork and completing the tax returns are among the hardest parts of running their rental property.

"You have to look at it like a small business," says Robert. "And as with a small business you have to file a statement of revenues and expenses for your rental property with your return each year."

Plex owners can benefit from a slew of deductions that are related to the apartments being rented out. A duplex owner who rents out one of the apartments, accounting for half the square footage in the building, can deduct half of the eligible operating expenses.

These include repairs, municipal taxes, a portion of the mortgage interest expense as well as administrative and accounting fees.

Building owners are also eligible to deduct capital cost allowance related to depreciation on the portion of the building that is rented out. But Robert advises building owners to think twice before taking advantage of this potential tax saver.

"Although you can deduct depreciation expense each year and it will reduce your tax burden, you should be careful," Robert says. "Because when you sell your property you will subject to a taxable gain from recaptured depreciation as well as capital gains taxes. And not many building owners plan for that."

According to Robert only about 20% of his clients claim capital cost allowance deductions.

Other advantages that accrue to rental property owners:

o Unlike interest income and dividend income, you can include rental income in your "earned income," calculation to determine the maximum amount that you may contribute to an RRSP.

o Upon death you can transfer the property to your surviving spouse without triggering any tax consequences.

o If you have several apartments and your spouse helps you to take care of maintenance or administration, you can pay him or her a "reasonable," salary, thus benefiting from income splitting.

Home buyers plan
If you are thinking about buying a home, a home buyer's plan can give you an attractive tax advantage.

A home buyers plan enables you to withdraw up to $20,000 from your RRSP, to buy a home without paying any tax on the withdrawal. In the case of a couple, the amount rises to $40,000. The amount must be paid back, in installments over a maximum period of 15 years.

 

For information related to the home buyer's plan:
http://www.ccra-adrc.gc.ca/formspubs/topics/tax/home_buyers-e.html

For information about the tax consequences of owning real estate check out information packages at the Canada Customs and Revenue Service Website at:
http://www.ccra-adrc.gc.ca/tax/menu-e.html

For information about rental properties:
http://www.ccra-adrc.gc.ca/E/pub/tg/t4036/t4036-e.html#P8_46

For information about principal residences (homes) and secondary residences (cottages) check out:
http://www.ccra-adrc.gc.ca/E/pub/tp/it120r6/it120r6-01-e.html

 

 

 

-- Posted April 1, 2004

Peter Diekmeyer is the Montreal Gazette's management columnist. He can be reached at: peter@peterdiekmeyer.com

-30-