Tax dilemma, need your advice

[jaccker]

I first give a short describe of my situation.



My wife and I bought a property several years ago as my principal residence. I bought the property around 620k and spent 60k for the renovation. The current value is around 800k and I will sell it a few year later(5-7 year). I expect around 300K capital gain and I know it is my principal residence and I will not pay the capital gain tax at all.



Now I`d like to rent out my basement. The monthly rent will be around 1k/month. My marginal tax rate is 46.4% while my wife`s marginal tax rate is around 39.4%.



I am thinking about several ways to reduce the tax I have to pay from my rental income.



1. Claim some monthly cost to deduct the rental income. However, I think I may have to pay some capital gain tax. Let`s say, if my house cost is 4000/month, I could deduct 1/4 cost for basement. It will be 1000/month. Now for rental income, I pay no tax at all.

But in the future, when we sell it, we need to pay 1/4 of our capital gain tax. Is it correct to you guys?



2. Because the house is owned by my wife and I. Could I put all the income to her name because she has lower tax rate than me?



3. Could I make some agreement with tenant, for example, give him/her some discount on monthly rent and ask him/her not claim the rental cost? Is it legal/do-able?



4. Is there any other best way to deduct the rental cost without impact my future capital gain?





Many thanks!

Jaccker

 

[JimWhitelaw]

I`m not an accountant and you should check with your accountant before taking any action, but here is my understanding:

You can deduct actual reasonable expenses from your rental income, so 1/4 of your mortgage INTEREST payments, 1/4 of your maintenance and repair costs, 1/4 of utilities cost unless tenant pays their own.

You don`t need to worry about capital cost allowance (depreciation) recapture upon sale unless you have claimed it previously. For a rental you can only claim CCA on the building, not the land.

If the home remains your principal residence for the entire time you own it, you`re probably not in danger of losing the principal residence capital gain exemption. If it becomes 100% rental at some time your exemption will be pro-rated for the time it was not your principal residence.

If the house is owned jointly, you`ll have to split the income/loss from rental the same as each share of ownership (likely 50/50).

 

[jaccker]

Thanks, Jim.

I think I read in this forum that if you rent out part of your principal residence property, you have to pay that portion of capital gain tax if you sell the property in the future. Can anyone clear it for me?


QUOTE (JimWhitelaw @ Sep 9 2009, 03:22 PM) I`m not an accountant and you should check with your accountant before taking any action, but here is my understanding:

You can deduct actual reasonable expenses from your rental income, so 1/4 of your mortgage INTEREST payments, 1/4 of your maintenance and repair costs, 1/4 of utilities cost unless tenant pays their own.

You don`t need to worry about capital cost allowance (depreciation) recapture upon sale unless you have claimed it previously. For a rental you can only claim CCA on the building, not the land.

If the home remains your principal residence for the entire time you own it, you`re probably not in danger of losing the principal residence capital gain exemption. If it becomes 100% rental at some time your exemption will be pro-rated for the time it was not your principal residence.

If the house is owned jointly, you`ll have to split the income/loss from rental the same as each share of ownership (likely 50/50).

 

[JimWhitelaw]

More info from CRA website:

http://www.cra-arc.gc.ca/E/pub/tg/t4036/t4...ml#P1764_102360

Changing part of your principal residence to a rental property

You are usually considered to have changed the use of part of your principal residence when you start to use that part for rental purposes. However, you are not considered to have changed its use if:

* the part you use for rental purposes is small in relation to the whole property;
* you do not make any structural changes to the property to make it more suitable for rental purposes; and
* you do not deduct any CCA on the part you are using for rental purposes.

If you meet all the above conditions, the whole property may qualify as your principal residence even though you are using part of it for rental purposes.

However, if you do not meet all of the above conditions, when you sell or change the use of the property, you have to:

* split the selling price between the part you used for your principal residence and the part you used for rental purposes by using either square metres or the number of rooms, as long as the split is reasonable; and
* report any capital gain on the part you used for rental purposes. You do not have to report any capital gain for the part you used for your principal residence.

 

[jaccker]

Cool, that`s sounds quite clear to me now. The information is very useful. It is a pleasure to learn staff here everyday.
QUOTE (JimWhitelaw @ Sep 9 2009, 03:47 PM) More info from CRA website:

http://www.cra-arc.gc.ca/E/pub/tg/t4036/t4...ml#P1764_102360

Changing part of your principal residence to a rental property

You are usually considered to have changed the use of part of your principal residence when you start to use that part for rental purposes. However, you are not considered to have changed its use if:

* the part you use for rental purposes is small in relation to the whole property;
* you do not make any structural changes to the property to make it more suitable for rental purposes; and
* you do not deduct any CCA on the part you are using for rental purposes.

If you meet all the above conditions, the whole property may qualify as your principal residence even though you are using part of it for rental purposes.

However, if you do not meet all of the above conditions, when you sell or change the use of the property, you have to:

* split the selling price between the part you used for your principal residence and the part you used for rental purposes by using either square metres or the number of rooms, as long as the split is reasonable; and
* report any capital gain on the part you used for rental purposes. You do not have to report any capital gain for the part you used for your principal residence.

 

[luckyluciano]

Be wise & do what everyone else does, number 3!

 

[jaccker]

Could you please tell me what is the way everyone deal with this situation?
QUOTE (luckyluciano @ Sep 9 2009, 09:48 PM) Be wise & do what everyone else does, number 3!