When my wife and I moved from our small two bedroom condo into a single detached house, we kept the condo as a rental property rather than selling it.
Related: Lessons from a First-Time Landlord
We knew we would now take on the responsibility of being a landlord but we thought it was the best decision to make at the time. There are a few tax points to consider for those who are in the same situation.
‘Change in Use’
When you move out of your principal residence and rent it out rather than sell it, the property has what CRA calls a ‘change in use’ – it becomes a rental property used to generate rental income, rather than a principal residence with no income.
This means there is a ‘deemed disposition’ on the date it becomes a rental (typically the day it is available to be rented out, or the first day after you move out). The value on this date is important to note because it is used to calculate any capital gains/losses if you sell further down the road.
The portion of any gains in the home’s value is sheltered when it is a principal residence, but it isn’t sheltered when it is a rental property.
For example: Let’s say you bought your home in 2005 for $325,000. You lived in the home until 2011 when you decided to rent it out. At that time it was worth $380,000. Since then, the value has increased to $400,000.
When you sell your home you will need to pay taxes on the capital gain when it was a rental ($400,000 – $380,000). Half of the capital gain is tax free, of course, and the other half gets taken into income in the year you sell the home.
Note – there is a way to avoid a deemed disposition – the principal residence exemption. Click here for more information.
Since the home is now a rental property you are able to claim depreciation as an annual expense against the rental income you receive.
Most expenses related to a rental property are fairly straight forward – advertising, insurance, utilities, mortgage interest, etc. But CCA (Capital Cost Allowance – depreciation for tax purposes) isn’t so straight forward and may actually increase the taxes you pay when you sell later on.
We don’t claim CCA on our rental property because I personally think it’s a short term deduction that will result in an increased tax bill down the road for us, but each situation is different and it’s always best to consider your own situation when deciding whether to claim it.
Moving Back In After Renting Out Your Home
Some people actually move back into their home after they have rented it out for a period of time.
This is common for people who want to take time off to travel but don’t want to sell their home, people who have temporary work assignments overseas or people who just decide to move back in because they like their original home better.
Whatever the case, the rental income earned while the home was being rented out still needs to be claimed.
The date you move back in is considered another ‘change in use’ by CRA and could affect the taxes owing when the home is sold.
For example: if you bought a home in 2008 and lived in it until 2010 when it was rented out, and then moved back in 2013 – any increases in the home’s value while it was a rental would be taxable. A situation like this can be tricky and if in some cases might be best done by an accountant.
Note – there is a way to avoid a deemed disposition, called a principal residence exemption. Click here for more information.
Renting Out a Portion of Your Home
Renting out a portion of your home has become more common in major cities like Vancouver, where the average house price is above $700,000 and many people cannot afford a single detached home on their own.
Basement suites are common and are considered ‘mortgage helpers’ because of the income they provide.
When you rent out a portion of your home you need to claim all of the income you receive and can deduct the relevant percentage of the eligible shared expenses.
For example: if you rent out your basement which is 50% of the total size of the home, you could claim 50% of the mortgage interest, utilities (if they are paid by you), taxes, insurance, etc.
Conclusion: Things can get tricky when dealing with taxes if you rent out your home, or a portion of your home. It’s best to review the basic rules on the CRA website and give them a call if you are unsure about your situation and consider hiring an accountant.
Related: How to Reduce Your Mortgage Penalty