Reporting Sale Proceeds of Residential Rental Property (Land and building)

Tax Topics
1

A client sold a residential rental property (single family dwelling on a residential lot) in 2024.

The property has been rented since 2015 when it was changed from being used as principal residence to rental property (a formal appraisal was obtained). I don’t know if change in use was reported properly at the time, but this is not my primary concern.

T776 has been filed every year. No CCA has been claimed on this rental at any time.

The sale price in 2024 ended up being less than appraised value. However, do I need to prorate the proceeds between land and building?

If I use appraisal in 2015 which separates value of land and building, and then split the 2024 proceeds between land and building using latest government assessment for property tax purposes, I obtain the following result:

Land was sold at a loss, building was sold at a gain. Overall loss.

Do I also pro-rate the selling expenses (realtors and legal fees) and allocate them to building and land?

How do you normally handle it on schedule 3 and T776?
thanks

2

It’s one property and the losses offset the gains either way. Don’ make it harder than is is. No prorating required.

The property should be listed on T776Asset as an asset of the rental. Enter the proceeds and expenses there and it should flow through the schedule 3.

In this case, the land has the loss and house has the gain there would not be a terminal loss.

3

Allocation of proceeds should always be checked. In cases where a building (depreciable asset) is sold at a loss and associated land (capital asset) is sold at a gain, ss.13(21.1) of the Income Tax Act serves to reallocate the proceeds so that you don’t get a terminal loss and a capital gain.

In this case, it seems the taxpayer likely has the opposite situation (gain on building, loss on land) so this provision will not apply here. The ITA does not view this as one property so you can fall into traps if you don’t allocate the proceeds.

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4

Must be only place in Canada where values have dropped since 2015. :face_with_diagonal_mouth:

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5

@iain.fyffe is correct - where there is land/building you MUST allocate as between the two. They’re treated differently, given that one is depreciable property and the other non-deprecciable. There MAY be no actual difference, but there CAN be. And yes, if you’re gonna split, also split the costs.

I’ve had the odd anomalous circumstance similarly…it happens.

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