Client had a rental property but allowed their son to move in rent free in 2021. She lives in another house that she owns. Does her son moving in to her former rental home create a deemed disposition? Can she still file a form allowing her to defer the disposition under section 45(2) without penalty?
There are several threads on this forum discussing the 45(2) election - try searching for them. Your client’s situation may not be entirely the same as others, but the answers are applicable. Basically, if she owns 2 houses, and she lives in one of them, the other cannot be her principal residence.
You’re stuck in a rut here … 45(2) isn’t applicable, as the property was a rental property to begin with, you’re referring to a 45(3), which goes the other way.
Your client can only have 1 principle residence, so the rut is that she shouldn’t be electing under 45(3) anyways, as this will cause a capital gains conflict with her current principle residence.
Before I comment further, it’s worth asking what the duration of the sons stay is expected to be?
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Thanks. I did research these before hand but wanted to be sure. My conclusion is that she can claim the rental as her principal residence and defer the capital gains until she sells.
That is not a sufficient conclusion.
If your client lives in another property that she owns, assuming that is her primary residence, you need determine which property will be deemed principle. You can only have 1, and if she sacrifices her current residence for the principle exemption on the rental property, than you are subjecting her to capital gains implications on her current residence.
This is why I’m asking what the duration of the sons stay is… you might have to just sweep this under the rug altogether.
Thanks, he got divorced and once back on his feet, will get his own place or start paying rent to her. I think that if he payed rent from the beginning there wouldn’t be a problem? But, he would have to pay at least 60% of the current rent market.
Personally, I would assume the property to remain as a rental and have them sort their arrangement out behind closed doors. You might have FMV subjectivity issues with rent, but at the very least the change in use attributions were discarded.
Yes. But, isn’t that her choice to pay capital gains on the property she lives in? She is old and might live the rest of her life their. Isn’t it okay as long as she understands the trade-off?
Sure, but as I mentioned above, why give her the choice at all … let them work it out and leave the property as it is. The son is not a dependent. Just consider the FMV implications on rent … it’s a much more tolerant ordeal, both from an accountant, and taxpayer perspective. There’s no need to over think this.
Re: PRE:
If your client owns a second house (or condo, or real-estate property, etc), and the person living there is her son, yes - she could choose to designate that property as her PR for the period of time that her son lives there, and for up to 4 years later, if a 45(2) election is properly submitted. But, during that time period, she cannot designate any other property as her PR. So, she could shelter some gains on the secondary property for a few years, but she would lose the PRE on the place she lives during that period.
Re: rent:
If she is not reporting rental income (at FMV) then she cannot claim rental expenses. This should be obvious. If you’re living in a house, you can’t get tax deductions for insurance, property tax, etc just because you live there. Similarly, if you own a second house, and you “provide” for family or friends by letting them live there, you can’t claim expenses for that property.
Connection between rent and PRE:
If there is a “change in use” from personal use to business use, or vice-versa, there is a deemed disposition of the property. If the owner continues to report rental income while the son is living there, then there is no deemed disposition. It doesn’t matter whether the son ACTUALLY pays rent, as long as the owner REPORTS rental income (at FMV). However, the PRE could not be applied to the rental property unless there was a “change in use” at some point.