How do I Report the Sale of my Principal Residence Turned Rental?
I purchased “Home A” in May 2009 and lived there until August 2017. I moved to “Home B” in August 2017 and kept “Home A” as a rental (one family rented it and I reported rental income on my tax return but did not claim any CCA).
I want to designate Home A as my principal residence from 2009 to 2017.
How do I calculate my gain for schedule 3 in this specific case?
In 2017 do I have a deemed disposition at FMV (since the use of the property changed), where this FMV becomes my new ACB? If so, if my FMV is my new cost, do I still get to add legal fees and land transfer taxes to the FMV to come up with my new ACB (as well as any capital costs incurred after 2017?
One of the tax software programs out there told me I have to fill out form T2091 (IND)-WS E “Principal Residence Worksheet” and form T2091 (IND) E (20) “Designation of a Property as a Principal Residence
by an Individual (Other than a Personal Trust)” and physically mail them into the local tax office… this seems so strange to me that this would need to be done for every sale relating to a principal residence designation… has anyone else done this? Is this necessary?
Not using TaxCycle, it’s actually for my sister who is using H & R Block online program to file her taxes. Normally very simple each year but this year with the sale she needed some advice, and I’ve been out of the tax game for years now and am not sure how to deal with this situation specifically.
The T2091 should have been filed with the 2017 return as a deemed disposition at fair market vale, and the sale of the rental property is reported in the year of the sale.
The ACB is the 2017 FMV plus any capital costs incurred on the rental. Legal fees and land transfer taxes are added at the time of purchase, not years later to the FMV. They are considered part of the FMV.
Thank you! Just to clarify, in the last sentence, did you mean they are NOT part of the FMV?
In 2017 they were trying to sell the principal residence, they only ended up renting it out because the market was going down and they couldn’t sell it for what they wanted… everything was up in the air…
What should they do now? Do they need to retroactively file the T2091 for 2017? Will that involve penalties? It wasn’t like they purposely turned it into a business, it was just passive rental income that happened while they were trying to figure out what to do and pay for two mortgages because they couldn’t sell the old house.
The T2091 Principal Residence Designation came into effect in October 2016 to close a loophole house flippers were using to get out of paying capital gains tax. As @helga_spence said, it should have been submitted in 2017 when the change of use occurred. Your sister will need to file a paper T2091 with a cover letter asking that the Voluntary Disclosure provisions be applied to the late reporting and citing that she wasn’t aware of the change in legislation requiring this disclosure. CRA has so far been good with waiving penalties and interest associated with filing it this way and will often send a letter of acknowledgement accepting of the late filed form.
This is very helpful advice, thank you! One thing I just mentioned in another reply was that the T2019 says “If you are filing electronically, keep this form in case we ask to see it later. If you are filing a paper return, you must complete, sign, and attach this form to your return.”
Since they e-filed in 2017 would there really be a voluntary disclosure required? Because it sounds like they just needed to keep a copy in case CRA requested it? Not sure how there would be penalties in that case. I’m assuming there would be and I’m missing something, but just trying to give them some direction on what to do now Thanks again!
When filing any forms electronically (netfile, e-file, etc), the information on the forms gets transmitted to CRA but CRA doesn’t have the signatures to go with it. When CRA sends a letter asking for the signed forms, they now want to see the signatures. For examples, as e-filers, we have to receive signed consent before we can e-file any returns to CRA. CRA will then randomly audit us to make sure we are adhering to this protocol and ask to see a subset of the signed forms, and if we can’t produce them, we could lose our e-file license. It’s the same with this T2091 form. Information from the form is transmitted on filing, but now they want to see the actual signed form. If you are filing a tax return by paper and attach the signed form, then they already have the signed form so there is no need to request it as they do with electronic filing.
If your sister didn’t file the T2091 form with her 2017 return, then it still needs to be submitted, either by filing an adjustment to the 2017 return to include it, or by filing the form by paper with a cover letter. The advantage of filing by paper is that you can specify on the paper that you are submitting this under the Voluntary Disclosure Provisions or Taxpayer Relief Provisions, whereas there is no place to specify that if you simply file an adjustment to the return using Change My Return online. Although, I recently filed a series of adjustments for a client going back 10 years using the Change My Return option online and CRA’s Notice of Reassessment stated that they allowed the claims under the Taxpayer Relief Provisions.
There is NO GAIN to report, unless you sold the home in 2018 or later.
When the house is sold (at some point in the future), legal fees, realtor commissions, etc are OUTLAYS which can be DEDUCTED from the gain. I don’t know what land transfer taxes are, because we don’t have such a thing in Saskatchewan, but I doubt that you have to ADD them to the FMV.
When the house is sold (at some point in the future), you will have to report the gain based on the formula:
Gain = proceeds - cost - outlays
At that point the “cost” will be the FMV of the house when it changed from principal residence to income-producing property (i.e. 2017). That FMV is easiest to obtain in the year that it happened. You can get an appraisal done years later, but the cost of that appraisal will be much higher than one done using “current” market data.
Alternatively, the gain could be calculated using the PRE formula:
[((total number of years owned - (number of years owned as principal residence +1)) ÷ (total number of years owned)] x (proceeds - ORIGINAL COST - outlays)
In this case, the “ORIGINAL COST” is what you paid for it in 2009. Using this method, you don’t need an appraisal at 2017 market values, but the gain may be higher or lower than the gain calculated using the first method.
No matter which method you use to calculate the gain, you still have to file the T2091 for 2017, even if you don’t use that 2017 value when you eventually sell the house.
I strongly suggest you should see a professional accountant as you may be much better served by filing a late 45(2) election. Then no deemed disposition and the home could be considered your principal residence for 4 additional years if you choose… that’s IF they accept the late 45(2) election.
Well, that’s if you want to delay the change-in-use date. And, during the 4 years covered by the 45(2) you can’t have another property designated as a principal residence. If you have BOUGHT another house, you have to decide which one to designate as your principal residence for those 4 years. But, that doesn’t eliminate 40(2)(b). As per Example 4, the PRE formula was used to apply the “+1” year even though they didn’t live in the house for 5 years.
No, @krobertsonk did not say that the house was sold, so there is no need to calculate a PRE yet. That may happen in the future.
And, late-filing a 45(2) is an option, but if the client bought a new house, they may not WANT to designate an additional 4 years to the rental house, because they would lose those 4 years as principal residence in their new house.
Thanks again!