Rental Property (Condo) Tax Returns

[I-Hate-Hulse]

I know lots of people here have revenue properties so I'll try this rather obscure question here. It's tax related so excuse the geek speak.

The rental property in question is an apartment style condominium held in fee simple. In short, I don't believe the "land" is held in ownership by the owner. A unit factor of the common property is owned, but not "land" per se.

In terms of claiming CCA for a rental property, one has to make a distinction between the cost of the "land" and that of the "building". In a detached house that's easy, but how does one apportion the purchase cost of the condo, which is usually not divided into land and building? Or is the definition of land not applicable in a condominium - and I can roll the entire purchase price into Class 1 CCA?

One other curveball - do you have to file something with CRA to formally declare a "change in use" (deemed disposition) from Principal Residence to rental property? Reading From T776 is doesn't appear I have to do anything, unless I actually sell the place.

I called CRA and got someone who was really only good for reading off her computer screen. Anyone here slogged through a rental return? Thanks

[calf]

Check out Interpritation Bulletin 304R2, Paragraph 6 - http://www.cra-arc.gc.ca/E/pub/tp/it...it304r2-e.html

From what I gather, you get a proportional interest in items such as land, parking lot & other common areas, and this must be seperated out for CCA purposes, even though your condo doesn't necessarily have a land component (unless it's a ground unit which has a balcony or something of that nature). Your proportional interest, apparantly per paragraph 2c), should be in documents filed with the land registry.

re: the rollover/change in use - not sure about any filings...I'll look

[calf]

Just browsing the CRA website as well, when you make the change, there is a deemed disposition, which will result in a taxable capital gain. What you can do, is attach a letter (no form) electing to defer the gain under 45(2). You'll have to report the rental income (of course), but cannot claim CCA on the property.

This link goes over changes in use:
http://www.cra-arc.gc.ca/tax/individ...es/menu-e.html

This one goes over changes from personal use to rental property:
http://www.cra-arc.gc.ca/tax/individ...gingall-e.html

Hope that helps a bit - I haven't done too many returns w/ rental income.

[I-Hate-Hulse]

Originally Posted by calf

Check out Interpritation Bulletin 304R2, Paragraph 6 - http://www.cra-arc.gc.ca/E/pub/tp/it...it304r2-e.html

Yup - I had read 304R2 earlier and thought about using unit factors to satisfy "proportional interest" in reflecting common property. Problem is - think about your typical 900sq ft condo and you'll see something like 200/10,000 as your unit factor interest (2%) depending on condo building size. Now apply that to a $200,000 purchase price - that's like assigning $4,000 to land which seems absurd - and really immaterial. [EDIT - then again, with 50 units in a place is it that absurd? Maybe not. But the below still holds true]

However, if you think about it, your prorata share of common property doesn't reflect the value of the land at purchase. It's more for things like hallways, parkades, and other common property.

All the official condo Land Titles I've seen for apartment style condos (all 3 of them, anyways) don't apportion an amount between land and building, just one sum.

[EDIT - the 45(2) principal election exemption is only applicable if you have to move somewhere for a job, and return to your original house later on - not if you decide to rent your place for profit.]

Thanks Calf!

[calf]

Originally Posted by I-Hate-Hulse

Yup - I had read 304R2 earlier and thought about using unit factors to satisfy "proportional interest" in reflecting common property. Problem is - think about your typical 900sq ft condo and you'll see something like 200/10,000 as your unit factor interest (2%) depending on condo building size. Now apply that to a $200,000 purchase price - that's like assigning $4,000 to land which seems absurd - and really immaterial. [EDIT - then again, with 50 units in a place is it that absurd? Maybe not. But the below still holds true]

However, if you think about it, your prorata share of common property doesn't reflect the value of the land at purchase. It's more for things like hallways, parkades, and other common property

All the condo titles I've seen for apartment style condos (all 3 of them) don't apportion an amount between land and building, just one sum..

True - and I agree. I guess if you were to be technical, that would be how you'd seperate it out, in the real world, doesn't make much sense. I'll see if I can find out more tomorrow.

[EDIT - the 45(2) principal election exemption is only applicable if you have to move somewhere for a job, and return to your original house later on - not if you decide to rent your place for profit.]

Thanks Calf!

frick - too late for me to be researching tax topics - of course, I should've assumed you looked in all the same places as me. I believe the 'having to move' portion is if you defer the gain for 4 additional years, the first year is ok, as long as you recognize the gain in the subsequent year.

Also, take a look at T2091(IND)
http://www.cra-arc.gc.ca/tax/individ...g/T2091-e.html

as well as T664
http://www.cra-arc.gc.ca/tax/individ...ng/T664-e.html

This probably confirms what ya already know...I'll see what I can dig up tomorrow.

[Bobblehead]

DO NOT DEPRECIATE YOUR CONDO!!!

Your condo won't go down in value and when you sell it all that depreciation will become recapture (that is 100% taxable income) added to your income at the same time that you will have a capital gain to report. .

A simple example
Initial Value of property 100,000
Total Depreciation claimed - 12,000
If you eventually sold the property for 180,000
On you tax return you would be required to claim 12,000 income and 80,000 capital gain.

Claiming depreciation on a property that will increase in value is rarely (if ever) a good idea.

As far as the Change in Use, I have never actually seen anyone file the letter. AS long as in your records you keep the date of the change of use and something to establish the value of the unit at the time of the change of use (selling price of another unit sold at around the same time) you will be fine. The only issue I've seen arise is debate about the values of properties at the time of the change of use.

[I-Hate-Hulse]

Originally Posted by Bobblehead

DO NOT DEPRECIATE YOUR CONDO!!!

Your condo won't go down in value and when you sell it all that depreciation will become recapture (that is 100% taxable income) added to your income at the same time that you will have a capital gain to report. .

Wow, this is turning into a real example of Tax planning.

You're spot on bobblehead on recapture - can't believe I let that slip my mind. CCA is really just a tax deferral (not tax savings) mechanism in this situation. Now that said you might want to actually claim CCA to generate the deferral. Not having to pay taxes on $8,000 a year (assuming a $200K) place certainly generates some future value considerations.

Your recapture thought made me think of something though, assuming there's contribution room in an RRSP - that would be a great place to "shelter" some of the proceeds of the condo when it is sold, thereby offsetting the CCA recapture in the year of sale.

Calf - after reading 304R2 a little closer, it appears I can go for a 45(2) election to have my principal residence extended despite my not actually living there. This is good for a period of 4 years but is indefinate if you move for work. Thing is, you can't designate another principal residence, which makes this election moot.

After all this though - I think it boils down to how long the condo will be kept, and prevailing thoughts on the direction of condo prices.

[Bobblehead]

The CCA would defer claiming some of the income but you must claim the recapture in the same period you sell the unit and then you will have taxable capital gains on top.With those taxable capital gains you will probably be in the top tax bracket in that period, so you really don't want to defer more income to that time.

RRSPs are a much better tax differal since you can pull the money out over a number of years.