Purchase and Sale of Rental Property
The capital cost of your rental property is recorded in your personal tax return on form 776. The cost of the building is recorded in the capital cost allowance schedule on this form, in the additions area. The cost of land purchased during the year is recorded at the bottom of form. The cost must be recorded in Canadian $.
When a rental property is purchased, the split of cost between land and building should be agreed upon by the vendor and purchaser. The vendor may want a higher portion of the selling price to be allocated to land, in order to avoid recapture of capital cost allowance, if any has been claimed. The purchaser may want a higher portion of the purchase price to be allocated to building, in order to claim more capital cost allowance.
When a rental property is sold, the amount that is the lower of cost or proceeds from the sale of the building is entered in the capital cost allowance schedule on the T776. The difference between this amount and the undepreciated capital cost (UCC) will be brought into income as recapture. This amount will be nil if no capital cost allowance has ever been claimed for the building. The proceeds from the sale of the land is entered on line 9924 of the T776. Any capital gain or loss (proceeds less cost) is recorded on Schedule 3. Generally, allowable capital losses can only be used to reduce or eliminate taxable capital gains.
Tax Implications of Owning a Cottage or Second Home
Income Tax Act s. 40(2)(g)(iii), s. 54
A cottage, or second home, is considered personal-use property, if it is used primarily for the personal use or enjoyment of
• the taxpayer,
• individuals related to the taxpayer, or
• where the taxpayer is a trust, a beneficiary under the trust or any person related to the beneficiary
There is no deemed disposition if a person moves into their cottage, so no tax will be payable as a result of this move. However, if the use of the property changes from personal use to being used for the purpose of gaining or producing income, such as a rental property, there is a deemed disposition. See our article on change in use of real estate.
When a cottage is sold, tax is payable on any capital gain, less any principal residence exemption. If there is a capital loss, the loss is not deductible, because losses on personal-use property are not deductible except for listed personal property (LPP) losses, which can be deducted from LPP gains.
It is important to keep a record of the adjusted cost base of both the primary home and the cottage, to be used to calculate the gain on sale. If the cottage has been owned since before 1972, only the increase in value since December 31, 1971 is taxable, because taxation of capital gains began with the 1972 taxation year. December 31, 1971 is the valuation day (V-day) for properties owned prior to that date.
Expenses you can deduct
You can deduct any reasonable expenses you incur to earn rental income. The two basic types of expenses are current expenses and capital expenses.
Capital expenses provide a benefit that usually lasts for several years. For example, costs to buy or improve your property are capital expenses. Generally, you cannot deduct the full amount of these expenses in the year you incur them. Instead, you can deduct their cost over a period of several years as capital cost allowance (CCA).
These expenses can include:
• the purchase price of rental property;
• legal fees and other costs connected with buying the property; and
• the cost of furniture and equipment you are renting with the property.
The following is a list of expenses that are deductible:
• Prepaid expenses
• Legal, accounting, and other professional fees
• Maintenance and repairs
• Management and administration fees
• Motor vehicle expenses
• Office expenses
• Property taxes
• Salaries, wages, and benefits (including employer’s contributions)
• Other expenses
Expenses you cannot deduct
Land transfer taxes
You cannot deduct land transfer taxes you paid when you bought your property. Add these amounts to the cost of the property.
You cannot deduct the repayments of principal on your mortgage or loan on your rental property.
You cannot deduct any penalties shown on your notice of assessment or notice of reassessment.
Value of your own labour
You cannot deduct the value of your own services or labour.
Personal portion of expenses
If you rent part of the building where you live, you can only claim the amount of your expenses that relate to the rented part of the building.