Say what you will about the 25-to-30-something crowd, but there is a certain crop of them, at least in the circles I travel in, who are starting very young in developing a housing rental business to complement their long-term career aspirations. Property barons with student debt hangovers. Video gamer landlords. D&D aficionados with pointy shoes, a real estate paper under one arm and a Starbucks latte mustache. I must admit, their youthful quirks haven’t hindered their laser focus on building a portfolio of rents.
Barely out of college, (or not all), or barely shaving, (or not at all), they make chatter at lunch about tenant quality, price per door, and those peskily low Vancouver cap rates creeping northward. I admire their pluck. Keep at it, and manage the downside risks and they will do okay I suspect.
But do watch those cap rates.
And it isn’t not just the millennials. I know of a single mom who went after this business about 15 years ago, all squirrel-eyed and sweaty-palmed. Nervous about the first one she bought, asking me a few questions about financing (my job at the time). Today I would be her grasshopper. She owns something like 20 of them, and will no doubt retire comfortably.
In other housing matters, another installment today (the 3rd in a row) on the taxation ins-and-outs of Canada’s Principle Residence Exemption.
Designating your principal residence
Prior to 2016, you weren’t required to report anything to the Canada Revenue Agency (CRA) with respect to the sale of your principal residence if the property was designated as such for every year you owned it. If a different property, such as a cottage, was designated as your principal residence for one or more years during the same period of ownership, CRA required additional filings.
Under current regulations, when you sell your principal residence (or are deemed to dispose of it, say at death) you are required to report the date of acquisition, the proceeds of (deemed) disposition and the address of the property. If the property was your principal residence for every year you owned it, you’ll need to make the principal residence designation on Schedule 3 of your tax return.
If you don’t report the disposition or fail to make the principal residence designation in the year of the sale, you can ask the CRA to amend your tax return. The CRA may be able to accept a late-filed principal residence designation in certain cases, but a penalty may apply, calculated as the lesser of:
o $8,000; or
o $100 for each complete month from the original due date to the date your amendment request was made.
The tax implications of a change in use
Where you convert your principal residence to a rental property, any resulting capital gain on the deemed disposition can usually be eliminated or reduced by the principal residence exemption up to that moment. If you’re unable to eliminate the gain, you can make an election to not recognize the deemed disposition. This allows you to defer the recognition of any gain until you sell the property. If you make this election, you still have to report the net rental or business income you earn from the property and cannot claim depreciation on the property. Even if you’re able to eliminate the gain using the principal residence exemption, you may still want to file this election. In addition to deferring the gain, the election allows you to designate the property as your principal residence for up to four years, even if you don’t use the property as your principal residence. However, you can only do this if you don’t designate any other property as your principal residence for this time. To make this election, attach a letter (signed by you) to your income tax return for the year in which the change of use occurred.
Where you convert your rental property to a principal residence, you may also elect to not recognize the deemed disposition and defer the recognition of any capital gain until you actually sell it. Keep in mind that you can’t make this election if you claimed depreciation on the property for any tax year ending after 1984. If you make this election, you can designate the property as your principal residence for up to four years before you actually occupy it as your principal residence. To make this election, attach a letter (signed by you) to your income tax return for the year in which you sell the property, or 90 days after the date the CRA asks you to make the election, whichever is earlier.
The deemed disposition rules also apply where there’s a partial change in use of a property. Under the current rules, an election can’t be made to defer any capital gain that is deemed to be realized as a result of a partial change in use of a property. The 2019 Federal Budget proposes to allow an owner of a multi-unit residential property to make use of the elections to defer the gains where there is a partial change in use of the property on or after March 19, 2019.
Mark Ryan is an Investment Advisor with RBC Dominion Securities Inc. (Member–Canadian Investor Protection Fund), and these are Mark’s views, and not those of RBC Dominion Securities. This article is for information purposes only. Please consult with a professional advisor before taking any action based on information in this article. See Mark’s website at: http://dir.rbcinvestments.com/mark.ryan