Principle Residence>Rental>Sold

[tome]

I have a new client small business client. Bought home in 2011. Principle residence for 3 years. Moved in with partner and house became revenue property. Claimed income expenses. Sold house in 2020. What happens with increase of value while principle residence and how shall I claim the increase in value. She had a realtor value property annualy.

Thank you for your ideas

[Nezzer]

@tome
Similar question was asked/answered here:

Converting PR to rental property

An elderly client moves out of his condo in 2020 and moves in with his daughter and son-in-law. The move will likely be permeant. He decided to keep his condo and rent it out. The condo is owned jointly by all three of them - the elderly man, his daughter and son-in-law. I see two options here: Change of use and deemed disposition at fair market value of the condo in 2020. In which case the capital gain will be offset by the man’s PR Exemption. 45(2) Election whereby there would be no chang…

To summarize, you have several options:

1. Using FMV (appraisal, etc) as of the date it was first rented (2014?), consider it a “change in use”. Gain from 2011-2014 is covered by the PRE. Gain from 2014-2020 must be reported on S3.
2. Try to submit a “late filed” 45(2) election, to extend the PRE for up to 4 years, then report the gain from 2018-2020 (using appraisal, etc from 2018 to determine the capital cost).
3. Use the “years-plus-one” formula to calculate the exempt proportion of the gain based on the number of years it was principal residence (no appraisal needed).

[Versa]

It is my understanding that you HAVE to report the change in use in the year it occurs. I’m not sure if this actually happens in practice though, especially if it was the principal residence for all years before the change. You could try to file the 45(2) election now if no CCA was ever taken on the property but I am not certain if there would be a late-filing penalty. If the election is accepted, then you use the calculation @Nezzer described in #3 but add 4 years to the formula. So it would be Gain X (3+1+4)/10

This is a pretty detailed folio of the topic: Income Tax Folio S1-F3-C2, Principal Residence - Canada.ca