Author Topic: Renting out part of my principal residence - future capital gains?  (Read 662 times)

AJDZee

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Hello,

I've just finished gutting/renovating an old home that's way too big for just myself, and as such I'm renting out 2 floors.

I'm a first-time landlord and just starting to learn how the taxes will work.

My question is, with the renovations I did to the house (50% of which is for the rental, let's assume), is it advantagous to claim these capital expenses on my taxes?
And more importantly, will doing so lead to paying capital cains taxes in the future should I sell my house?

I don't plan on selling any time soon, and I also don't know how long I will rent out for - perhaps I'll have a family in the future and need the space back..? Just trying to gain an understanding of how it works and don't want to paint myself into a corner.

*I've already tried speaking to a 'tax professional' however I don't think this was his expertise, I left his office not any more clear on this matter*

Thanks in advance



Goldielocks

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Re: Renting out part of my principal residence - future capital gains?
« Reply #2 on: September 11, 2019, 07:42:49 PM »
I never carried a UCC balance for rental property that I thought would increase in value... so I did not depreciate capital improvements (capital expenses like a new roof) over time.

The reason is that you are hit with paying income tax on the recaptured UCC when you sell for more than the balance on the UCC line... plus any capital gains that you incurred.

For some people, claiming UCC over say, 10 years, while they have a very high income (so they have losses), then selling property in a low income year and paying the tax later (e.g., when retired) makes sense.  There are other scenarios that can make sense to claim UCC, too.... but generally if you expect value of the buiding to increase, don't claim UCC.

Prairie Stash

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Re: Renting out part of my principal residence - future capital gains?
« Reply #3 on: September 16, 2019, 02:36:36 PM »
When I rented my basement suite out I was able to deduct the interest for the mortgage in proportion to that part of the house (40%).  Plus I deducted 40% of the utilities, insurance etc. as rental expenses. For your situation, estimate the total income (rent), subtract expenses (interest, utilities, etc.), what kind of paper profit do you have? Use some numbers to get a handle on the scale of the question.

When it was all done I was left with no profit, on paper, since it was all going against the deductions. I never claimed capital deductions because I had enough other deductions. By cutting my expenses by 40%, I came out ahead on a personal basis, that's where I saw the benefits. Plus, it paid for all the interest on the house I didn't need at the time; its now converted to space for my kids to play and my wife and I to enjoy (I was single when I bought the house, my situation improved). 

I also had roommates, which is classified differently than a tenant. A roommate shares a kitchen, a tenant does not. Roommate rent is not considered as income. To be clear, are you going to have separate entrances and separate kitchens from your renters? My city would never have zoned me for 2 suites in my neighbourhood, but I was zoned for a single suite (at 40% or less of the total property size).

This advice only applies to an owner occupied house. It is different than a true rental property, the situation is more nuanced and much more beneficial to the owner.