USS Concert and Capital Gains Exemption On Rental Property

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Podcast Transcription

Erwin Szeto [00:00:11] This episode is brought to you by the Halton Real Estate Investors Group this month in November. We have bestselling author Quentin D’Souza coming to speak. He will be sharing his lessons on defending your real estate wealth. He’s the author of the property management toolbox How to Guide for Ontario Real Estate Investors and Landlords. The Filling Vacancies toolboxes that I step by step guide for Ontario real estate investors and landlords for renting out residential real estate and the Ultimate Wealth Strategy your complete guide to buying, fixing, refinancing and renting real estate investments. Quentin practices what he preaches, and he is a systems so investor himself. Also, he just loves sharing his knowledge. I know Quentin quite well. I’ve known Quentin for close to 10 years and he is a wonderful speaker and a wonderful educator. So you do not want to miss this. For those who like to think big, you’ll want to see what Chinese investors are up to in St. Catharines. We have backed Charles while buying developer Charles Ware and developer Andy Tran. They’re not quite foreign investors, but they are of Chinese ethnicity, and they’ve landed in one of our hot spots for investments, and that is St. Catharines, Ontario. They’ve acquired a fair sized parcel of land with two houses on it, and they’re adding eight more properties. They’re going to build eight more houses on this land, so you won’t get into the minds of these Chinese investors, any and Charles Lau who are thinking outside the box. With both land development and building development. To register, go to Halton. REI Dot S.A. slash sign up. Welcome, ladies and gentlemen, investors across the greatest country in the world. My name’s Erwin Szeto, a.k.a. Mr Hamilton, bringing you the truth about real estate investing show for Canadians where it is my job to bring you experts in the world of investing. We will learn from their experience, pick up the lessons, tips and tricks and figure out what makes them tick. So you too can replicate the success to enhance your real estate investors life of health, wealth, family, friends and fun. This week we have something different like we do every week and last week’s episode REIN Car. Now we’re stumped on the handling of the Principal Residence Capital Gains Exemption as REIN is entitled to, as he recently sold his principal residence and is moving into a rental property. So this area real estate tax is not well known. I didn’t have the answer, so I did what any other investor would do. I walked down my hall to my wife’s office and asked her, It just so happens. I’m married to Cherry Chan of Real Estate Tax Tips Dossier, who is a who is a professional accountant. And it just so happens that this month she was published in CPA magazine, where she goes on to educate chartered professional accountants on the subject of capital gains tax on investment property. And so I walked back to my office. I called my wife click record as to how to properly maximize one’s returns by declaring a rental property as one’s principal residence, how to do so properly, along with some difficult add on questions. I hope you all enjoy this as I know how difficult it is to find answers to these very specific questions without having to pay heavy accounting fees. And as always, everyone’s situation is different so deeply. So do please contact your professional accounting accountant specializing in real estate investments for your own personal situation. So without further ado, I give you Cherry Chan questioning an accounting question from last week’s call with Ryan Carr. So he what is he’s actually sold conditional his principal residence, and I recall there’s the option to be able to declare your rental property for as principal residence. Can you explain how that works?

Cherry Chan [00:03:51] So there are really some criteria that you need to comply with before you can actually declare a rental property as your primary residence. There is something that the number one criteria is always that you have to live in the property, whether it is before, before your before you convert the property into a rental property or after you convert, after you rent it out for a few years and you move back in. There is always a component that you need to live in the property at some point in time, so that’s number one. There are a bunch of other criteria that you cannot convert. You cannot do any structural change to the property to accommodate the rental properties, as well as you cannot claim capital cost allowance against a primary residence. Those are the other criteria that you need to look at. But the main thing is that for someone who has lived in the property, I always use your I always like to use your brother as an example before someone who has used a has lived in the property and turn it into a rental, and he actually moved out and rented another place. He is allowed to use an election to extend his primary residence exemption for four more years, and that election is available to be filed in the year that he turned the property into a rental. Now, at any given point in time, you can only designate one property as your primary residence. So meaning that if you left this property and buy another property and you turn the current property as rental and then you also have another property, chances are you cannot just claim both properties as your primary residence, right? I’m not sure if that makes sense to you, but that I and I also do not know Ryan Carr’s situation very well, so I don’t know how to apply these rules to his particular situation.

Erwin Szeto [00:06:00] OK, well, let’s stick with this current example. So you see you move out of your home and you rent it out after you, after you, after you start renting it, when you start renting it. Is that the period afterwards? Is that still exempt? Should you go sell the property

Cherry Chan [00:06:18] for four more years? If you filed the election, oh, you don’t. You don’t claim capital because loans on the property. You don’t do structural change to the property, and that is really how you would be able to get accepted for four more years, which is a lot, right?

Erwin Szeto [00:06:36] So for those people who like Ryan’s current situation, so you obviously don’t listen to last week’s episode. It is OK. I know a good percentage of the world doesn’t listen to my podcast

Cherry Chan [00:06:47] that also includes, oh yeah,

Erwin Szeto [00:06:50] it’s in Ryan’s example. He sold his home because he’s bearish on the market, but he could have he could have rented out his home. In theory, you could refinance his home, put some of his equity or rented it out to make it work, or at least break even. And then within four years’ time, if you should sell it, then he’d be able to, not because he’s going to, he’s going to rent his next home. He won’t have to pay capital gains on that property.

Cherry Chan [00:07:20] Yeah. Yeah. Assuming that he has always lived in the property and then he’s not, he doesn’t have any other primary residence in the next four years and he is filing the election on time. Well, then we have a different issue. If he refinanced his property, like you said, you had the same year two in the past to you. If you refinance primary residence two parties and turn it into a rental property and parties and other primary residence, the interest on the loan would not be deductible.

Erwin Szeto [00:07:53] Right, right. That’s another discussion.

Cherry Chan [00:07:55] Yeah, exactly.

Erwin Szeto [00:07:57] OK, so sticking with Ryan Carr’s example, so he’s since sold his home. He’s moving into a new property. That’s a rental. So what about the next property? Can he buy another property? And as he does, he typically duplexes things. And then could he declared that as his principal residence if he has intention to move into it? Wow. Actually, does within four years

Cherry Chan [00:08:25] is such a loaded question, so. So remember when we first started this conversation, we had the criteria. One of the criteria is that you cannot make structural change to your property. So a lot of people who buy these postwar bungalow codes and turned a basement into legal, especially when you use legal that term legal, legal, secondary swede and rent it out. Technically, you cannot claim the entire property as your primary residence because you make structural changes to the property right now, even if you move into upstairs. So in that case, you won’t be able to claim upstairs as your primary residence and downstairs, you still should be technically required to pay Cal blogging on it. Now, if you, let’s say you buy a property and you turn it into two units and then it’s being rented out upstairs, downstairs and four years of four years down the road or something you like a few years down the road, you decide, OK, well, it’s not necessarily four years. If it is, the sequence is change. But if a few years down the road, you can file another election to turn this property as your primary residence for four more four additional years, obviously provided that during the same period, you don’t designate any property as your primary residence. You move into the property and again, provided that you don’t claim capital cost allowance on the property. That is, you would be able to file an election and claim four more years of shelter, four more years of capital gain under the primary residence exemption. But again, that is a lot of if you don’t do that, if you don’t do so, be sure to consult a professional accountant. Don’t do this on your own if you don’t know all these if, right?

Erwin Szeto [00:10:21] Mm hmm. Here’s another if for you What if? What if you buy an existing turnkey duplex?

Cherry Chan [00:10:32] But. So, oh, my God, this is my husband who turns me into a corner, so like, I mean, I don’t know who the listeners are if you buy a turnkey duplex. It is a duplex, so it is already legal to use it. So one of the criteria of your primary residence exemption is that you have to have it as your primary residence. So the main use of the property and tie a property has to be used for the purpose of you living there, not for rentals. So if it is properties as a duplex, you truly rent it out in the basement or something like that, something to that extent. It is a known fact, and more than 50 percent is considered rental properties that it would be a primary. It would. You cannot qualify for primary residence exemption, although for the rental unit.

Erwin Szeto [00:11:38] Right, right. So good advice would be to other than speak to your professional accountant. The other good advice would be to definitely you have to live in the larger unit. So the majority of the property is meant for your principal residence.

Cherry Chan [00:11:52] Yeah, because the rule is actually not that clear. It is clear and it is not that clear. The word that they use is ancillary to your to your primary residence purpose. So, so you truly do have to be careful with your rental unit. And for those of those people, like self-employed people that we claim Home Office expenses, you really have to be careful in terms of the combined usage between Home Office once your rental portion. Otherwise, you would not be able to shelter the capital gang, except that they could truly jeopardize that primary residence exemption.

Erwin Szeto [00:12:30] Okay, very cool. So let’s note for listeners benefit to give you some context, I asked Sherry for five minutes. So I have one last question. It’s just because I think this is the future for many people. We know plenty of people who are on the cusp of not affording being able to afford a home or basement suites are becoming a means for people to afford to live in the house, for example. Like where we live, lots of people rent their basements out to either family or to regular tenants. What are the tax benefits of renting out your basement like? What? What deductions are reasonable? Should you rent a portion of your home to a tenant?

Cherry Chan [00:13:20] So if you do run out a portion of the home to the talons, you would be able to claim a portion of your home expenses unless you obviously would have to utilities build two meters for all your utilities to internet bills and those what does a different story. But for the most part, you would be able to. Let’s say you rented out one third of your entire home, so you would be able to deduct one third of all your of your utilities and property taxes, mortgage interest, as well as insurance against that property. But you cannot beat out any automobile expenses for that to earn the income. You ideally do not claim capital cost allowance against that rental income. So to preserve the primary residence exemption?

Erwin Szeto [00:14:18] Right. And that’s a mistake that some investors make accountants make. What is what is the implication if you do claim capital cost on the rental portion of your property, including home offices? What’s the what’s the implication? So when you go to?

Cherry Chan [00:14:37] Yes, but you also couple calls sorry, you lost the primary residence exemption for that particular year, actually, maybe even longer than that particular year. I haven’t really looked into it, but the ones you claim it, you lost a portion that you use for rental purpose. So in our example, early as one third. So if you sell it for $300000 more than you will have a capital gain of one hundred thousand dollars subject to tax

Erwin Szeto [00:15:05] and that be a fair amount of tax to pay rent,

Cherry Chan [00:15:10] depending on your tax rate. Yep.

Erwin Szeto [00:15:12] All right. Very cool. So for listeners who enjoyed this, enjoy learning about real estate tax tips, charity work and working people learn. Follow you regularly to receive real estate tax tips.

Cherry Chan [00:15:27] So I do have a blog. Weekly Tax Tips blog that I share with my follower. It is on the website Real Estate. Tax tips start k. It’s REI real estate tax tips that k you can sign up there and you will have this weekly blog post delivered to your email every single week.

Erwin Szeto [00:15:50] Awesome. You have a book as well, do you know?

Cherry Chan [00:15:53] Yes, I do have a book is available for sale on Amazon as well, so you can go to Amazon dossier and search for my name Cherry 10. Or you can go to my website. There is a link there

Erwin Szeto [00:16:08] which website

Cherry Chan [00:16:10] you have so many, but there’s only one website Real Estate likes to starts here. OK. All right.

Erwin Szeto [00:16:17] All right. Thank you very much. And for listeners, if you enjoyed this link, let me know and then we can have you back for five minutes or more next time. Great. Thanks very much, Terry.

Cherry Chan [00:16:28] Thanks. Bye. All right.

Erwin Szeto [00:16:38] Steven, thank you for listening. If you enjoyed this podcast, please subscribe on Stitcher, Google Play or iTunes, however you’re listening to this, or I can send you an email when each episode is published right to your inbox. Simply go to truth about real estate investing dossier and your email address, and I will continue to deliver to you stories of inspiration, success and lessons to help you on your journey to financial freedom. Till next time, this is Erwin Szeto telling you to just do it and I believe in you. We.

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