converting a rental to primary residence - capital gains tax in canada?

Question

my understanding is that if a rental property becomes a primary residence, there are capital gains on the conversion. in my situation, i only own 1 property, but do not live in it (different town)-- i am a renter myself. would i have to pay cap gains in this instance considering i do not own my current residence.

Answer 1

YOU MAY WANT TO READ THIS ANSWER -- THE OTHERS ARE WRONG !!!

Yes, your understanding is correct that when you convert a rental property into a principal residence there may be capital gains consequences.
If you have never lived in this property but are contemplating doing so, what you need to do in order to determine whether there is a gain is to obtain a current "fair market value" of the property. In your case, you will want as low a value as possible, so get it appraised or ask a real estate agent to give you a potential selling price given the area, market values, and condition of house (so get this done BEFORE you make any repairs).
To determine if there is a CG : take the current FMV and subtract from it the price you purchased the house for (example....if you bought it for 80K and it is valued at 96K when you move in...then your gain is 16K) but from this 'gain' you get to subtract any costs or outlays you incurred (these include legal bills to purchase the property + land transfer taxes + appraisals + capital improvements to the property that were never expensed such as new furnace or new roof or new appliances etc....) so to continue the example...if these totalled 12K, then your CG would now be 16K - 12K = 4K...so you would need to pay tax on HALF of this gain or 2K. The tax would be whatever your tax rate is for your income level x 2K (21%, 31%, as high as 46%).
If your CG is actually negative, then there is NO tax owing as there is NO capital gain.
Also, here's a small but significant point, if you have not been claiming the rental income on your tax returns these past years, then you certainly would be foolish to all of a sudden claim capital gains.

In a nutshell, you will want to have as LOW a fair market value as you can currently, have as many outlays accounted for as possible (many of these will be found on the Statement of Adjustments from the lawyer at time of purchase -- also any bills for improvements) as these go to lessen the 'actual' or deemed gain.
Also, if you initially did live in the house for a time and then converted to rental...then this may be of benefit as when you converted to rental (there is no CG as it was primary residence) the FMV at that time becomes your ACB - Adjusted Cost Base, which you use to calculate the CG instead of the purchase price.

Also, be careful reading the advice some are giving -- they really sounded unknowledgable.

Answer 2

Question: I lived in my home for 10 years then rented it out for 3 years while renting another place. What would the tax consequences be if I now decide to sell my home?

Answer: If you move from your home, rent it out and then decide to sell after several years, tax rules permit you to designate your home as a principal residence for four years after a change of use. Write the Minister of Revenue a letter to "elect" to designate your home as a principal residence at change of use. You must not claim any capital cost allowance or depreciation on the home while it is rented during the election period. The same rule would apply if you bought another home.

In that case, during the first four years, the new home would not be designated a "principal residence" if you elected your former residence (rental) property as your principal residence for those same years. You and your significant other (including common law or same sex partner) cannot own two principal residences at the same time for tax purposes. You must choose one during the over-lapping period after 1981. Professional advice will help you optimize tax benefits.

Answer 3

The answer is a very simple NO. Keep your own residence and there is no capital gain tax on that if you eventually sell.There is no conervsion tax either or else, there would not be conversions of apartments into condos if there were.

Answer 4

No. capital gains applies only to income property sales. If you are converting an income property to a principal residence capital gains does not apply.