A homeowner owned two homes, his own home and a home he purchased for his adult child to live in. He sold the adult child’s home after 3 years. Market value of the child’s home increased at a faster rate than the market value on his own home, implying a higher capital gain on the daughter’s home compared to his own home for that same time period.
I’ve reviewed the Income Tax Folio S1-F3-C2 on Principal Residence Exemption (PRE), which discusses 1) ownership; 2) only one residence except in year of purchase & sale of a property; 3) family unit which includes children under 18 yrs of age. Older children can apply the PRE on their own home that they purchase.
I’ve read elsewhere that if the homeowner moved, say to a Personal Care Home, and had no other principal residence, and if his adult child lived in his home, that the PRE could be applied for all years despite he himself not living there.
So in this case, with the home purchased for his daughter, could the homeowner claim this home for the PRE since it was occupied by his child, and then at some point in the future when he sells his own personal residence, claim the capital gain for that same 3 year portion. In this way, he is still reporting only ONE Principal Residence, but reducing the capital gains tax by applying it to the property with a lower market value.
Appreciate your thoughts on this.
Without doing extensive reading, my gut feel on this is “no”…for one basic reason. One of the considerations of a PRE is that the kids (if using that example) must be <18 yr…given that you said she is an “adult”, isn’t this immediately offside?
If he owned both properties, he can choose to designate one or the other as his principal residence for that period. The folio indicates that he or a family member must OCCUPY the home to qualify for the PRE. With his daughter living there, that occupancy condition is satisfied. But, you still can have only one principal residence AT A TIME. So, he must choose one or the other for that 3 year period.
The example of a homeowner living in a care home applies when that person does not own the care home (typically a “care home” is a multi-unit building, where many un-related people RENT a unit from an arms-length company). So, the person living in a care home still has only ONE house that he OWNS, and is OCCUPIED by a family member. As such, it qualifies for the PRE when he sells it. Note that the house does not qualify for a PRE for the relative (i.e. daughter) because the relative does NOT own the property.
Thank you, @Nezzer. This is exactly the way I’ve assessed this situation but wanted to exercise caution before applying this strategy. One concern was that the child is over 18 years of age, so like @SmallBizGuy’s comment, I too questioned if this was offside. But if the PRE can be applied where an adult child is living in the home and the owner is in a Personal Care Home and does not declare any other property for his PRE, then it makes sense that the rules would be transferable in this situation with this adult child.
Over the years, there have been many comments in the various posts about taxpayers wanting to claim deductions they aren’t eligible to claim and the potential ramifications of same (ie: JUSTJOE stressed jail time in many of his posts, etc). Since thousands of dollars can be saved in this scenario by applying the PRE to the daughter’s property for those 3 years vs to his own house, I thought it best to validate my thinking, knowing that others may require this knowledge if this situation arises for them. So thank you again, @Nezzer, for validating my thoughts.
My two cents… We may no longer be the accountant on record at that time of sale or deemed disposition.
I would include a detailed memo to taxpayer and suggest that they should add it to their important papers (separate from tax returns that often get binned) Hopefully, when the First home is sold or disposed of someone remembers that there is an issue to deal with regarding capital gains.
Excellent suggestion, @rachelavryl.
I often do prepare a client note like this, but in this situation, I’ll suggest to the client to place it with his legal package from the purchase of his home or a similar location to flag it for when he sells his home.
Reading this, the “other” home was purchased by the taxpayer for his adult child. I understand from this is that the taxpayer and not the child is on title.
Also, you have asked if the taxpayer (and not the adult child) can claim the PRE on the “other” home.
Based on these facts, I would suggest that the taxpayerr can claim the PRE, IF AND ONLY IF THEY DO NOT CLAIM THE PRE on the first home for the same period.
Second part of the question, not asked, is if the adult child can claim the PRE on the “other” home. That would depend on facts that have not yet been provided.
Thanks for the reply, @TimParris.
Yes, I am clear that ONLY the homeowner whose name is on title can claim the PRE, not a child who is NOT the homeowner and NOT on title. Since the parent taxpayer is homeowner of BOTH residences, it is a given that the adult child cannot claim the PRE on either of these residences. I am also clear that the PRE can ONLY be claimed on ONE property, not BOTH, for the years in question, so the other property, when sold, would claim the capital gain for those years in question. My question was mostly to make sure the homeowner had a choice in the PRE, that either property could be chosen, the choice based on which property had the best tax savings to the taxpayer. @Nezzer confirmed my thinking on this question.