Capital Suite

This post is 7 years old. The data and my views may have since evolved.

The topic of a rental suite in your house possibly triggering capital gains tax when sold has been covered extensively on this site (here and here and here).  In short, normally you don’t pay capital gains tax when selling a principal residence, but a self-contained suite of significant size may mean that capital gains is due on the suite portion of the home.    So far the writing from CRA and several articles indicate this is the case, but we’ve also heard that several local accountants have dismissed the concerns especially when the suite is small in relation to the whole house.   It certainly seems that the more self-contained the suite is and the larger it is relative to the property, the greater the chance it could trigger capital gains.   As always, ask a professional about your personal situation.

Even if capital gains tax applies due to your suite, what would be the impact?   Would the capital gains tax completely destroy the profit from the suite, making it better to buy a house without a suite?  To follow up on this, reader CuriousCat (who dug up the original information on this change) went through the calculations and produced a spreadsheet comparing two scenarios.   Here is CuriousCat’s analysis (edits for presentation in this blog):


What if you compare two buyers, both purchased a house for $800,000 and sold for $1,200,000, 5 years later? They both put 20% down, the only difference being that one buyer did not rent out a suite, while the other rented it for $1400/mth.

The point of the tax system, as we keep being reminded by the feds, is that they want it to be fair (an incorporated doctor should pay the same amount of taxes as a non-incorporated doctor, etc.)  So is it? Who comes out ahead? The buyer without the suite, or the one with the suite who is forced to pay all his taxes on the rental income and capital gains?

First we have the purchase of the two properties

Then we need to operate them for 5 years and calculate the total cash we have to put into them consisting of the mortgage payment and down payment, minus rent collected.

Then we sell both properties for $1.2M.

After 5 years, the landlord is ahead by $84,000.   But we haven’t paid any taxes yet.   If capital gains applies:

Then the landlord’s profit drops to $44,000.   And if the landlord reported his rental income every year (and writes off the relevant expenses):

In conclusion, even when paying capital gains and all income taxes, with very strong appreciation in a property, the landlord remains ahead by $36,640 for the 5 year period.    Of course we know most people don’t pay all their taxes (especially the capital gains), so then they come out ahead quite a lot.   You can access the spreadsheet here and change the numbers for your own analysis.


My Take:  Thanks to CuriousCat for preparing this.  While the impact of the capital gains is large if it applies, it would appear that it still makes financial sense to rent out a suite rather than leave it empty.  In times of slower price appreciation than the example, the impact would also be significantly less.

The other way to look at it of course is that the capital gains + income tax on the rental in the example combined to create a 56% tax rate.  That might be hard to swallow regardless of final outcome.

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John Drake
John Drake
October 2, 2017 9:04 am

Personally, I would not call what happened this year a correction. Perhaps a pull back in prices or maybe a return to seasonal fluctuations.

We haven’t yet had a dose of the cure in order to bring our market back into historical norms.

formerly known as John Dollar.

Local Fool
Local Fool
October 2, 2017 8:34 am

Michael,

In that case – you should borrow against your existing holdings to finance more RE purchases here in Victoria. The more, the better. If you truly believe it’s “just the halftime show”, it’d be near madness to do otherwise.

The sky’s the limit – or is it? Or perhaps it’s way, way off in interplanetary space somewhere…

Michael
Michael
October 2, 2017 8:17 am

They are coming down

Sideways/down… I think this is just the halftime show. However, I don’t believe the percentage gains following this mid-cycle correction (sideways consolidation) will be as high as the first half.

Toronto has further room to fall. Some areas of TO fell ~40% in the early 90s as Vic/Van continued climbing. Strangely enough, Toronto didn’t bottom until the mid-90s, or about the same time Vancouver was peaking.
comment image

Barrister
Barrister
October 2, 2017 12:38 am

John Dollar:

A good analysis although I am not sure that it is a luxury goods market. It is primarily driven by middle class retirees and not by local purchasers. Or people transfer from high income and value markets to Victoria.

But i can see the first signs of a slow down and the numbers from Vancouver start to decline. The next six months might be interesting.

totoro
totoro
October 1, 2017 8:32 pm

Yeah, that is completely wrong CS.

A CCPC can pay dividends to related parties as long as they’re shareholders of the CCPC, or can pay reasonable salaries to related parties when they’re employed by the CCPC.

Income sprinkling through giving dividends to family members who are shareholders is completely legal and not a criminal offence or tax evasion.

CS
CS
October 1, 2017 7:22 pm

@ Introvert:

Are doctors who currently “income-sprinkle” unscrupulous? They’re simply doing what the tax code allows.

Quite wrong. Income sprinkling is method of tax evasion achieved by spreading income among family members who have done little or nothing to earn it. It is thoroughly unscrupulous and is, in fact, a criminal offense.

John Dollar
John Dollar
October 1, 2017 7:15 pm

The number one question people ask about real estate when it comes to value is how prices are relative to the assessed value to their home.

In September, the median sales to assessment ratio for a house in the core districts was 120%. The typical house selling at 1.2 times its assessed value. 74% of all properties that sold that month sold within 10 percent of that median. Or to put it another way there is a 74% chance that your house is worth be 108 to 132 percent of its assessed value.

And here is the median sales to assessment ratio month by month for 2017

In January it was 126% (July 1, 2016 assessment were published part way through this month)
February 120%
March 121%
April 124%
May 123%
June 120%
July 119%
August 119%
September 120%

Rock steady prices despite the market being considered a very strong sellers market with low inventory, low sales to new listings, low days-on-market.

The market was in equilibrium between buyer and seller with stable prices during the year at that price level. If the market had not been in balance then prices would have increased or decreased.

In my opinion, it comes down to price elasticity. Real estate has moved from being a normal good to a luxury good as we see the collapse of the middle income market. And that’s why the historical measures of a balanced market in terms of months of inventory, sales/listings ratio and DOM are different from what we see today.

John Dollar
John Dollar
October 1, 2017 3:29 pm

I think they are coming down too. There are a lot less WTF moments.

EBQ
EBQ
October 1, 2017 2:09 pm

They are coming down. Everything is.

It’s all over

Bitterbear
Bitterbear
October 1, 2017 8:51 am

Is it my imagination or are prices up the penninsula coming down? I notice that almost everything in my parameters that has sold recently, has sold under ask.

caveat emptor
caveat emptor
September 30, 2017 10:19 pm

Not necessarily the case. They could say that you can continue to do fixed term leases but you must stop renting the place for X months afterwards. That would allow the person in your example to keep doing it, but prevent the serial fixed leases.

You are right Leo. They COULD do it in a smart way that keeps legitimate uses of a fixed term but removes its use as “rent increase limit evader”. I hope that is what happens.

EBQ
EBQ
September 30, 2017 9:51 pm

Can someone tell me what 591 Aurora Way. MLS 382865 sold for. Appreciate it.

Local Fool
Local Fool
September 30, 2017 6:37 pm

I honestly don’t think that adjusting the law re the fixed term lease is going to make much difference to landlords in the medium or long term.

Depending on what they draft, it may provide a more reasonable degree of protection for tenants, but I would also like to see a better process to deal with tenants that trash a place or decide the 1st of the month is just too inconvenient a date to pay. Hope they drop that $400.00 per annum to renters too. Weird and gimmicky policy, IMO. But I digress…

Barrister
Barrister
September 30, 2017 6:27 pm

I dont think that a lot of people will stop renting their suites because of this change but it might move the needle a couple of notches against renting out a suite in the first place.

I wonder if they will grandfather the existing one year leases or whether they will simply apply the law to already existing leases.

The other factor to take into account is how much of a premium are you paying to buy a house that has a suite in it. My biggest concern is that many people really dont have a clear idea of what they are getting into when they rent their suites.

EBQ
EBQ
September 30, 2017 6:07 pm

Can someone tell me what 591 Aurora Way. MLS 382865 sold for. Appreciate it.

Hawk
Hawk
September 30, 2017 6:02 pm

“If you have a suite or other rental, provide it at a fair price and follow all the landlord tenant rules you are providing something of value to the market whether or not you “need the money””

But why risk having someone like this in your house if you don’t need the money and keep it for family visits and extra personal space ? Who says I owe it to the market so I may have to listen to someone’s obnoxious noise/smells etc ?

“Another friend of mine currently rents out the south side of his house, while he lives in the other part. Constant “oontz, oontz, oontz, oontz” (dance music) during the day, clanging dishes at midnight, slamming cupboards, leaving the bathroom fan on, loud telephone conversations at odd hours. At that point – why even have your own house.”

John Dollar
John Dollar
September 30, 2017 5:39 pm

Instead of evicting them, pay them to leave. Then you’re not going to get an angry tenant trashing the place.

Local Fool
Local Fool
September 30, 2017 4:47 pm

But our tenant is awesome, so there are no hard feelings.

In my view, that’s how it should be – most especially if they’re living in your house. A friend of mine moved out of his GH home about 10 years ago to go live on his boat, but hung onto the house to rent it out. He was inexperienced as a LL, and wound up getting quasi-professional tenants. We went over the RT Act several times, and the means to get them out were legally obvious – but of course the police don’t enforce that Act; that requires the actions of a court. Meanwhile, the tenant just files appeals to drag it out and…oh hell it’s awful. He was so stressed out, but finally they did move of their own volition. Friend then sold the house. But…it’s not always the big things that get you. The little things can be almost worse.

Another friend of mine currently rents out the south side of his house, while he lives in the other part. Constant “oontz, oontz, oontz, oontz” (dance music) during the day, clanging dishes at midnight, slamming cupboards, leaving the bathroom fan on, loud telephone conversations at odd hours. At that point – why even have your own house.

Folks, if you own a home and have a great live in tenant with compatible lifestyles, that’s a blessing as far as I’m concerned. There’s few things worse than having a menace in your own house that you’re nearly powerless to get rid of, or it’s almost bad enough to warrant proceedings – but not quite.

Introvert
Introvert
September 30, 2017 4:06 pm

I would rather rent out a suite to someone on a M2M basis, and do robust screening at the front end.

We’re in the fourth or fifth year with the same tenant, on a month-to-month agreement (it’s getting to be so long I’ve lost track). We haven’t raised the rent once. Because of this, our tenant is getting a hell of a deal. But our tenant is awesome, so there are no hard feelings. Our arrangement is mutually beneficial.

Introvert
Introvert
September 30, 2017 3:51 pm

That is utterly illogical. Our economy would not work at all well if everyone who “didn’t need the money” withdrew their goods and services from the market.

Precisely.

That 55-year-old surgeon, whose house was paid off long ago, doesn’t “need” his $400k salary, so he’s greedy.

Introvert
Introvert
September 30, 2017 3:41 pm

Critics charge that unscrupulous landlords have been using the leases to force desperate tenants to sign on to new leases with hikes in rent far in excess of what’s normally allowed under the province’s Residential Tenancy Act.

Are doctors who currently “income-sprinkle” unscrupulous? They’re simply doing what the tax code allows.

That landlords use these leases doesn’t make them unscrupulous either.

I object to the “unscrupulous” characterization when landlords are operating lawfully.

Crappy journalism, Global News BC. Usual from them.

Hate the law, not the player.

caveat emptor
caveat emptor
September 30, 2017 2:34 pm

Seems like a lot of people have a fear of getting stuck with a bad tenant, or there are logistical reasons in that they only want to rent the suite x months per year, not year around.

Overall ending the fixed term is probably a positive as it has been widely abused.

The person it penalizes is someone who regularly rents out a suite or apartment for part of the year (and perhaps uses it themselves for the balance of the year). Under the old rules you could mutually agree with tenants that the terms was for 6 months or 8 months. Now you can’t or if you do it has no force of law. So you end up having to give notice under Sec 49 of the RTA (own use). That requires you to pay one month rent as compensation. That kind of sucks and is the kind of thing that could tip people (not most but a few) into not renting the space at all.

caveat emptor
caveat emptor
September 30, 2017 2:21 pm

It’s called greed, if they don’t need the money.

That is utterly illogical. Our economy would not work at all well if everyone who “didn’t need the money” withdrew their goods and services from the market.

If you have a suite or other rental, provide it at a fair price and follow all the landlord tenant rules you are providing something of value to the market whether or not you “need the money”

sedate
sedate
September 30, 2017 1:44 pm

I managed to stay off Hawk’s slash list, sold my Townhome for 1% over asking in Central Saanich. Now just need to Househunt for an overpriced property that is prime for winter discount 🙂

Local Fool
Local Fool
September 30, 2017 12:59 pm

“If this is introduced I am not renting my suite anymore.”

Kind of like,

“If Donald Trump gets elected, I’m moving to Canada”.

A few will do it, but almost all of them are just spouting off. Unless they emphatically declare, “and I mean it, too”. Then you just know they’re totally serious. 😛

As for getting stuck with a bad tenant – there’s eviction clauses you can use, and they’re gone. Of course, that’s practically speaking. You can get the odd “professional tenant” that will exploit you, but I don’t think that’s the norm. Most tenants will leave if the LL wants them gone, especially if they live in the house with the LL (ie basement suite).

I would rather rent out a suite to someone on a M2M basis, and do robust screening at the front end. True, screening can’t catch everyone – but that’s just the risk that comes with renting your place out.

Hawk
Hawk
September 30, 2017 12:02 pm

A look into the future. Everything starts at the top. 😉

Up to 50% off million-pound homes! Buyers sense an opportunity as luxury property market is hit by stamp duty hikes and Brexit concerns

http://www.dailymail.co.uk/property/article-4934348/Million-pound-homes-having-asking-prices-slashed.html

John Dollar
John Dollar
September 30, 2017 10:41 am

There is utility (other than finances) to the suite if not rented which is worth something. Sure, some people need the cash flow and don’t have the option of choosing but many people in Victoria also don’t need the cash flow to survive on a monthly basis

Something that I hear occasionally as well. However, they find realty different when they no longer have the cash coming in that they have grown accustom to. They may not need the money but they find they have to get along with less without it.

John Dollar
John Dollar
September 30, 2017 10:30 am

“If this is introduced I am not renting my suite anymore.”

A bluff that few take seriously.

Marko Juras
September 30, 2017 9:47 am

It’s called greed, if they don’t need the money. Most of them will keep renting. The thought of an empty space making zero dollars drives them psycho. I know a couple.

I don’t know if it is all greed….my parents paid off their home a long time ago and they’ve rented their suite since and they don’t really spend money on anything. My mom in particular likes the social component and invites tenants upstairs for dinner all the time. They’ve had tenants from Tanzania, Japan, Chile, China, etc., she keeps in touch with all of them.

They’ve also kept the rent on a nice 2-bedroom suite (Oaklands Area) at a $1,000 for at least the last 10 years (various tenants). Could probably get $1,300 to $1,400 now.

Hawk
Hawk
September 30, 2017 9:35 am

“Sure, some people need the cash flow and don’t have the option of choosing but many people in Victoria also don’t need the cash flow to survive on a monthly basis.”

It’s called greed, if they don’t need the money. Most of them will keep renting. The thought of an empty space making zero dollars drives them psycho. I know a couple.

Interesting article by a developer/planner/architect, if you own or are thinking of buying an older condo. This is already happening in Vancouver and just a matter of time til the developers stick their mitts in the older buildings over here.

Opinion: So you want to liquidate your aging condo building…

http://gellersworldtravel.blogspot.ca/2017/09/opinion-so-you-want-to-liquidate-your.html

Marko Juras
September 30, 2017 9:10 am

In conclusion, even when paying capital gains and all income taxes, with very strong appreciation in a property, the landlord remains ahead by $36,640 for the 5 year period.

It’s not about remaining ahead, but about being ahead by an amount that makes it worthwhile. Right now I have close friends in my suite staying for 6 weeks. They were house shopping when the place they were renting sold and they got the boot. I was able to put them up in my suite until their house completes end of October. After they leave I’ve offered it for free to a couple of fellow Croats coming to Victoria in November on Work Holidays Visas while they look for a long term place to rent.

There is utility (other than finances) to the suite if not rented which is worth something. Sure, some people need the cash flow and don’t have the option of choosing but many people in Victoria also don’t need the cash flow to survive on a monthly basis.

Marko Juras
September 30, 2017 9:02 am

Housing minister says legislation to end fixed term lease loophole ‘imminent’

I am 100% against end fixed term leases personally as I see landlords all the time completely take advantage of tenants with such leases; however, in the discussion I’ve been participating on other websites the opinion is quite different. Quite a few comments along the lines of

“If this is introduced I am not renting my suite anymore.”

Seems like a lot of people have a fear of getting stuck with a bad tenant, or there are logistical reasons in that they only want to rent the suite x months per year, not year around.

Hawk
Hawk
September 30, 2017 8:59 am

4405 Tremblay Dr in Golden Head slashed $50K.

Starter house at 1716 Albert Ave still can’t sell after #3 slash for $35K total.

Quite the story on the Chinese real estate money laundering. Looks like a house of cards about to crash.

I wonder how many properties were bought over here ? No worries, the local media doesn’t actually do real investigative work that might risk painting the town in a bad light. Bad for tourism and advertising dollars ya know. 😉

“But a foreclosure petition filed by another mortgage lender Gao used to buy the home, Accountable Mortgage Investment Corp., said that as of June 2017, the property had over $28.8 million in mortgage loans secured against it from eight different lenders. Jin, who was eighth lender in line, claimed he was now owed $8 million on the property, according to the petition.”

Barrister
Barrister
September 30, 2017 8:33 am

Local Fool:

I was wondering if this might affect some people with basement suites. On the other hand maybe there is no impact. Wondering what everyone’s thoughts are about this?

Local Fool
Local Fool
September 30, 2017 8:03 am

Housing minister says legislation to end fixed term lease loophole ‘imminent’

B.C.’s housing minister is pledging to end a controversial “loophole” in tenancy laws that critics say has been contributing to the housing crisis.

Housing advocates have long criticized fixed-term leases, tenancy contracts which usually specify a one-year term of occupancy. Many such leases contain a “vacate clause,” which requires the tenant to either move out at the end of the term, or sign a new lease.

Critics charge that unscrupulous landlords have been using the leases to force desperate tenants to sign on to new leases with hikes in rent far in excess of what’s normally allowed under the province’s Residential Tenancy Act.

In its throne speech, the NDP government pledged to take action against the leases, and on Friday Housing Minister Selina Robinson said legislation is due soon. “…I’m confident to be able to tell you today we’re doing it.”

https://globalnews.ca/news/3777657/housing-minister-says-legislation-to-end-fixed-term-lease-loophole-imminent/

John Dollar
John Dollar
September 29, 2017 8:21 pm

Active listings are up this month relative to last month and last year. While sales are down to their lowest level in five years.

That’s kept the median price of house in the core districts from rising. The increase for the first 9 months of the year is 15.8% relative to the same period last year. A very decent 9 months over 9 months increase for houses in the core.

Here’s how the different hoods placed.

District Percentage Change
Oak Bay 13.3 %
Saanich East 14.5 %
Victoria 12.9 %
Esquimalt 18.1 %
Saanich West 19.3 %
View Royal 10.0 %
Victoria West 8.2 %

But it has come at the cost of sales as the volume has continued its decline. We are down 32% in the number of house sales in the core so far this year from the same time last year. And it isn’t because of a lack of inventory as active listing are the same or slightly more than last year (1600 to 1700).

As for blind auctions or differed listings. They peaked in April-May when the sale price to original price ratio hit 102.3%. That’s down to 99.2% this month as the average days on market reached 30. Up substantially when the DOM was 16 in April-May. That’s not saying the differed listing marketing scheme is over, just that it isn’t as effective as it once was.

Hawk
Hawk
September 29, 2017 7:58 pm

2740 Dufferin Ave slashed $50K. Is Oak Bay going out of style ?

1611 Belmont Ave , #107 on #2 slash for $100K total slash to $499K. Even the top agent in Victoria couldn’t read the market right. Smells like some more downward prices coming.

Hawk
Hawk
September 29, 2017 7:40 pm

That’s great, the more that won’t be moving here because they’re lucky to have a job still after the industry has been decimated.

Introvert
Introvert
September 29, 2017 6:58 pm

Only 43,000 of them,in the last two years alone.

You love pointing out price slashes, so it stands to reason that job slashes are no different!

There’s a few people still employed in the sector:
comment image

https://work.alberta.ca/documents/industry-profile-mining-oil-and-gas-extraction.pdf

caveat emptor
caveat emptor
September 29, 2017 6:05 pm

Sorry but I don’t trust your interpretation on this one. I’d see an accountant about this.

Agreed. No one should rely on your or my anonymous blog tax interpretation.

Relying on the two CRA documents I linked is a safer bet. Provided one understands WTF they are saying (back to the accountant).

Hawk
Hawk
September 29, 2017 5:56 pm

“My bad. I didn’t realize that every employee in the oil patch was laid off.”

Only 43,000 of them,in the last two years alone.

Introvert
Introvert
September 29, 2017 5:07 pm

ICYMI, the oil market tanked 10 years ago and Calgary has 25,000 empty offices. It was in one of those damn internet articles you so despise.

My bad. I didn’t realize that every employee in the oil patch was laid off.

John Dollar
John Dollar
September 29, 2017 4:39 pm

Sorry but I don’t trust your interpretation on this one. I’d see an accountant about this.

Hawk
Hawk
September 29, 2017 4:36 pm

“3200 Exeter Rd in the Uplands is SOLD”

That’s interesting, it just got slashed $300K in last couple of hours. Guess the sale fell through.

caveat emptor
caveat emptor
September 29, 2017 4:29 pm

They have to be the same kind of investment. A capital loss against a capital gain in the stock market or a capital loss in the real estate market against a capital gain in the real estate market. And definitely never against income.

On further research my statement was wrong and so is yours. I guess that is what accountants are for or you can just read those damn tedious publications from CRA. https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4037-capital-gains-2016/capital-gains-2016.html#P637_60798.

Bottom line sale of certain kinds of properties can only generate capital gains, never (allowable) losses – one example is a personal use property like a cottage. Sale of certain properties may generate a loss or a gain that COULD ultimately count against totally different losses or gains. Sale of rental properties could lead to capital gains plus recaptured depreciation, or in rare cases a terminal loss that flows directly to income.

This provides a clear (provided you understand their acronyms) explanation for a sale of a depreciable property that I believe is consistent with the CRA http://people.ucalgary.ca/~law/tutorials/L541/lesson3_Part8_intro.html

This one has been shared on HHV before and is CRA’s example of when a house had partly been used for generating income. https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/personal-income/line-127-capital-gains/completing-schedule-3/real-estate-depreciable-property-other-properties/example-disposing-a-principal-residence-partly-used-earning-income.html . Given the choice of example I guess we can say that if you rent out 40% of your house you WILL LIKELY lose a portion of your principal residence exemption

Barrister
Barrister
September 29, 2017 4:05 pm

I may be wrong but was not 3200 Exeter sold in 2016 for about 1.8? Did it sell for almost double?

madremia
madremia
September 29, 2017 3:02 pm

3200 Exeter Rd in the Uplands is SOLD

Hawk
Hawk
September 29, 2017 2:51 pm

“I hear oil-patch jobs pay well.”

ICYMI, the oil market tanked 10 years ago and Calgary has 25,000 empty offices. It was in one of those damn internet articles you so despise.

Hawk
Hawk
September 29, 2017 2:46 pm

3200 Exeter Rd in the Uplands slashed $300K. Even the rich aren’t getting the bites on an award winning architect designed place.

4623 Ocean Park Pl in Golden Head/Mt. Doug waterfront almost new build on slash #2 for a $280K total slasher.

Meanwhile the second failed auction in a couple of days at 474 Foster Street jacks up the price $200K. Good luck with that.

John Dollar
John Dollar
September 29, 2017 2:44 pm

I guess the reason people claim CCA at all on rental properties is it is still better to defer income tax to the future (in some cases depending on brackets etc and not all markets see a lot of appreciation.

The ability to claim CCA is there. While I should not say never as there may be one person in a hundred thousand that has, It is so universally understood that no one claims CCA on a house or even an apartment block. Because property values have increased over the last 30 years, you would just end up paying back all of the CCA.

Assuming you sell the entire property at a loss (the long awaited crash arrives perhaps) then you have a capital loss to report. You can’t offset this against income but you can offset it against capital gains from other sources (say selling stocks or a different property), carry it forward indefinitely to offset future capital gains or failing that to count against income in the year of your death

They have to be the same kind of investment. A capital loss against a capital gain in the stock market or a capital loss in the real estate market against a capital gain in the real estate market. And definitely never against income.

Introvert
Introvert
September 29, 2017 2:38 pm

Just catching up on what I’ve missed:

Most young professionals with two solid incomes cannot afford to carry a mortgage of $650,000 for a single family detached house…

Good observation, but how do we know that is who is buying these places?

On the other hand there seems to be no shortage of people able to shell out $900,000 for a house, and also have a big truck in the driveway and go to the Bahamas every year.

How do we know they have a huge mortgage? With that truck, it sounds like it could be a newly retired couple from Calgary, who paid for the place in cash. I hear oil-patch jobs pay well.

I know many renters that are highly respected people, with professions that you can only dream about, with very big salaries and big down payments…

Sounds almost Trumpian, no?

“The job I’m doing is unbelievable…”

When I discovered that one of the bloggers was keeping a dossier of my comments going back years that got me worried. Normal people don’t do that.

Gosh, I don’t keep a dossier; I just wander over to the archive once in a while:

http://househuntvictoria.blogspot.ca/

… then anything you write is subject to being taken from its original contextual meaning for questionable purposes by ignoble person(s).

When the bullshit is revealed, the desperate last resort of the bullshitter is to say, “I was taken out of context.”

caveat emptor
caveat emptor
September 29, 2017 2:00 pm

Unfortunately you can’t claim a capital loss on your suite.

I am not sure I get that. Obviously if you keep the full principal residence exemption then there can never be a taxable capital gain or loss on the sale of the property.

However if you lose the principal residence exemption on a portion of your house then selling may create a taxable capital gain or loss – based on the portion of your property that was not principal residence.

Assuming you sell the entire property at a loss (the long awaited crash arrives perhaps) then you have a capital loss to report. You can’t offset this against income but you can offset it against capital gains from other sources (say selling stocks or a different property), carry it forward indefinitely to offset future capital gains or failing that to count against income in the year of your death.

caveat emptor
caveat emptor
September 29, 2017 1:38 pm

I doubt they are interested in people occasionally renting out their basements.

I hope not. I need to bug my accountant about this again. If I need to be reporting deemed dispositions (which I think I do in my personal residence starting 2016) then I don’t want to rely on just flying under the radar, especially as I have been reporting whatever rental income there was to CRA.

On the other hand it seems ridiculous to be reporting a multitude of deemed dispositions. We stopped renting earlier this year and at the time didn’t intend to rent any more. Then a friend of a friend needed a place to stay and we agreed to rent to her beginning in Nov, – but only for a few months till June. Then we are (probably) done with renting.

Maybe I can make the case that we have had a continuous use as occasional rental so there was never a need to report change of use.

caveat emptor
caveat emptor
September 29, 2017 1:27 pm

This is not advisable unless you can predict for certainty that your house will be worth less in 5 years. The capital gain portion will always be (sale proceeds – original cost basis) not (Sale proceeds – NBV). Any depreciation you have taken over the years gets added back to income.

I didn’t know that. I assumed you just paid capital gains off a lower cost base if you depreciated the property.

I guess the reason people claim CCA at all on rental properties is it is still better to defer income tax to the future (in some cases depending on brackets etc and not all markets see a lot of appreciation.

John Dollar
John Dollar
September 29, 2017 1:12 pm

You can’t offset capital losses against other types of investments. But I wonder if you had a capital loss in real estate and then years later a capital gain in real estate would you be able to offset that gain?

Curious Cat
Curious Cat
September 29, 2017 12:58 pm

“I am hoping that the periods of own use help demonstrate that this use was incidental to the main use as principal residence. But if not then we have a deemed disposition multiple times as we have switched uses which could be quite a headache to figure out.”

It’s a good argument and could work. Hopefully you won’t be in the position to have to defend yourself as CRA’s position would be that every time you switched uses, you were supposed to have reported it.

Curious Cat
Curious Cat
September 29, 2017 12:53 pm

“If you somehow knew in advance that you were not going to get the exemption then you would claim depreciation on part of the building and lower your tax bill for the five years here. At the end you would pay a bit more capital gains tax as your cost base would be lower.”

This is not advisable unless you can predict for certainty that your house will be worth less in 5 years. The capital gain portion will always be (sale proceeds – original cost basis) not (Sale proceeds – NBV). Any depreciation you have taken over the years gets added back to income.

Curious Cat
Curious Cat
September 29, 2017 12:49 pm

“What if the value of the house drops by $400,000? Then, if you have capital gains on other investments, you will be able to offset part of the loss.”

Unfortunately you can’t claim a capital loss on your suite.

John Dollar
John Dollar
September 29, 2017 12:38 pm

caveat emptor
September 29, 2017 at 10:11 am
If you are losing the principal residence exemption anyhow then shouldn’t you be claiming depreciation on the 50% of the house that is used for rental purposes?

Historically, it has not been a wise decision to claim the CCA (depreciation) on the improvements as the land value and construction costs have been increasing. That would mean you would have to repay the entire amount of depreciation you claimed over the years. The process is similar to when you buy a truck for business. You can write off the depreciation but if you sell the car for more than the depreciated value then you have to repay the difference.

September 29, 2017 at 10:17 am
My situation will be interesting. We have rented a portion of our basement at times and used it for own use at times. We have switched back and forth several times and the periods of own use have been significant relative to the total time we have owned.

Might not be as difficult as you think. CRA may simply accept the property assessments for those specific years that you changed the use of the basement suite.

caveat emptor
caveat emptor
September 29, 2017 10:17 am

My situation will be interesting. We have rented a portion of our basement at times and used it for own use at times. We have switched back and forth several times and the periods of own use have been significant relative to the total time we have owned.

I am hoping that the periods of own use help demonstrate that this use was incidental to the main use as principal residence. But if not then we have a deemed disposition multiple times as we have switched uses which could be quite a headache to figure out.

caveat emptor
caveat emptor
September 29, 2017 10:11 am

If you are losing the principal residence exemption anyhow then shouldn’t you be claiming depreciation on the 50% of the house that is used for rental purposes? Of course if you do that then you WILL lose the principal residence exemption. That is why it would be nice to have some certainty – (1) I am going to lose the principal residence exemption anyhow – might as well claim depreciation, or (2) I am not going to lose the principal residence exemption so I won’t claim depreciation since that in itself would make me lose the exemption.

If you somehow knew in advance that you were not going to get the exemption then you would claim depreciation on part of the building and lower your tax bill for the five years here. At the end you would pay a bit more capital gains tax as your cost base would be lower.

Garden Suitor
Garden Suitor
September 29, 2017 9:45 am

Curious Cat

“Affordability” is relative. For some people “affordable” means every single dollar going toward housing, utils, food, transportation, etc. For others “affordable” means up to 25% of their family income due to investment/retirement savings goals. I don’t doubt in Victoria there are more toward the former than the latter though.

Hawk
Hawk
September 29, 2017 9:42 am

1037 Symphony Pl in Cordova Bay on slash #2 for a total $140K slash down to $949K.

Hawk
Hawk
September 29, 2017 9:38 am

Interesting listen on BC real estate and how the developers get their friends, family and agents in on the condos then flog them to the sheeple. Also interesting CRA talk on false income reporting.

https://omny.fm/shows/the-jon-mccomb-show/vancouver-real-estate-housing-panel

CS
CS
September 29, 2017 9:36 am

What if the value of the house drops by $400,000? Then, if you have capital gains on other investments, you will be able to offset part of the loss.

Hawk
Hawk
September 29, 2017 8:22 am

RBC affordability report out and it doesn’t look good. Third worst in Canada. Chart is back to record highs. Only one way to go now. Look out below.

“Victoria – Lack of affordability is a growing issue for buyers
The homeownership bar continued to rise in Victoria in the second quarter.
Property values in the area appreciated quickly for an 11th consecutive quarter
amid still-tight demand-supply conditions. RBC’s aggregate affordability
measure jumped by 1.8 percentage points to a near record-high of 58.6%.
This is the third-highest measure among the markets that we track in Canada
after the Vancouver and Toronto areas. Clearly, the lack of affordability is a
growing issue for would-be buyers. Home resales activity cooled noticeably
by almost 23% in the past year. The silver lining of this correction, however,
is that the market tightness is easing, and more balanced conditions are in
sight. This should help ease some of the upward price pressure in the period
ahead.”

http://www.rbc.com/newsroom/reports/rbc-housing-affordability.html

Hawk
Hawk
September 29, 2017 8:13 am

Excellent investigative reporting by Sam Cooper. Money laundering into real estate and drugs is rampant due to Coleman killing the RCMP’s Integrated Illegal Gaming Enforcement Team in 2009.

Exclusive: How B.C. casinos are used to launder millions in drug cash

“The Macau whales were able to gamble with suspected drug cash supplied by Jin’s network, especially at River Rock Casino, the investigation documents allege. With those funds borrowed from Jin and “private lenders,” they were not only able to gamble, but to develop real estate in B.C.

Without naming names, a paragraph in the confidential MNP LLP audit of B.C. Lottery Corp. that the attorney general released last week describes underground banking channels that allowed “Chinese nationals” to evade China’s tight capital controls and transfer wealth into B.C.”

“In Part 2 of the investigation into the Silver Whale network, Postmedia will report on alleged connections between Paul King Jin’s associates and B.C. real estate development.”

http://vancouversun.com/news/national/exclusive-how-b-c-casinos-are-used-to-launder-millions-in-drug-cash

Curious Cat
Curious Cat
September 29, 2017 8:01 am

@garden suitor

That might be possible, but we’ve heard from a lot of people repeatedly that they can’t afford homes without the suite rental so it might be fair to assume that they aren’t investing the extra profit but instead using it to pay their bills and mortgage.

Curious Cat
Curious Cat
September 29, 2017 7:58 am

I just wanted to point out that you can change the tax rate in the spreadsheet and the other shaded cells if you want to play around with it. Even with the max tax rate of 47.70% you still come out ahead in this scenario.

And to Godfatheractual, I believe your house would be grandfathered if you purchased before any new strata bylaws, but I could be mistaken.

Garden Suitor
Garden Suitor
September 29, 2017 7:54 am

Mukluk

But the landlord had better affordability relative to their income (additional $17k/yr), meaning a better area, bigger yard, better house. Or if that wasn’t a concern, then more investment into a broad index portfolio, which should yield more than $36k net in 5 years.

Godfatheractual
Godfatheractual
September 29, 2017 7:13 am

Interesting read.

I’m looking at a house with a suite right now, only concern is that it is a bare land strata. Wondering if the strata (5 homes) could decide to create a by law not allowing suites?
Anyone have experience with property on a bare land strata? Would you stay away and only seek freehold?

Mukluk
Mukluk
September 29, 2017 6:43 am

For $36,000 net you lost the use of half your house for 5 years…

And had to hear people milling about in your basement… And had more repairs and wear-and-tear than you otherwise should have…

Barrister
Barrister
September 28, 2017 11:30 pm

I think that this is a very useful analysis. There are a number of other variables which one would need to play around with. For example both people buy the same house but one person renovates the basement to create a suite while the other does not. But this is a great staring analysis.

For some people the question might be whether it is worth five years of putting up with a tenant for this amount of profit. Are you better off initially paying less for a house without a suite in it.

But this chart goes a long way to helping people make an intelligent decision. Great thanks for all the work that went into it.