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The tax implications of owning property

With tax season upon us, now is the time to assess the tax implications of owning real estate. Whether you own a home, cottage or rental property, or are thinking of buying or selling, it pays to be informed about how these moves might affect your tax position.

Homes and principal residences
Owning your home is a big plus on the tax front because, unlike most other investments, capital gains on your principal residence are not subject to income tax when the property is sold or transferred.

The Canada Revenue Agency sets out detailed rules as to what qualifies as a principal residence, but in most cases it is the house, condominium, mobile home, trailer or boat you regularly live in during a given year.

Secondary residences or cottages
The catch is that since 1982, only one property per couple may be designated as a principal residence. Any other property (typically a cottage) must be designated a secondary residence and is subject to capital gains tax on the profits when it is sold or transferred.

Rental property
When most people think of rental property, they picture huge apartment blocks administered by giant corporations. Nothing could be further from the truth.

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The vast majority of rental buildings are in the so-called "plex" market -- duplexes, triplexes and so on. They are typically owned by sole-proprietor landlords who occupy one of the units and rent out the others.

Louis Robert, a financial planner with Centre Financier Carrefour, in Montreal, helps dozens of landlords complete their tax returns each year.

According to Robert, many landlords find that taking care of the accounting, paperwork and tax returns are among the hardest parts of owning rental property.

"You have to look at it like a small business," says Robert. "And as with a small business, you have to file a statement of revenues and expenses for your rental property with your return each year."

Plex owners can benefit from a slew of deductions related to the apartments they rent. A duplex owner who rents an apartment that accounts for half the square footage in a building, for example, can deduct half of his eligible operating expenses.

These include repairs, municipal taxes and a portion of the mortgage interest, as well as administrative and accounting fees.

Building owners can also deduct capital cost allowances related to depreciation on the portion of the building that is rented. But Robert advises building owners to think twice before taking advantage of this potential tax-saver.

"Although you can deduct depreciation expenses each year and it will reduce your tax burden, you should be careful," he says.

"Because when you sell your property you will be subject to a taxable gain from recaptured depreciation as well as capital gains taxes. And not many building owners plan for that."

According to Robert, only about 20 percent of his clients claim capital cost allowance deductions.

Here are some other advantages available to rental property owners:

  • Unlike interest income and dividend income, you can include rental income in your total earned income calculation on your tax return to determine the maximum amount you may contribute to an RRSP.
  • Upon death, you can transfer the property to your surviving spouse without triggering any tax consequences.
  • If you have several apartments and your spouse helps you take care of maintenance or administration, you can pay him or her a reasonable salary, thus benefiting from income-splitting.

Home Buyers' Plan
If you are thinking about buying a home, the Home Buyers' Plan can give you an attractive tax advantage.

The Home Buyers' Plan enables you to withdraw as much as $20,000 from your RRSP to buy or build a home without paying any tax on the withdrawal.

In the case of a couple, the amount rises to $40,000. In both cases, the withdrawal must be paid back in installments over a maximum period of 15 years.

You can read more about the Home Buyers' Plan here.

Peter Diekmeyer is the Montreal Gazette's management columnist.

-- Posted: Sept. 20, 2004
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