You don’t have to worry about capital gain tax on your primary residence property in Canada. However, when you switch your primary residence to a rental property, capital gains tax can become a part of the equation. If this is the case, you should consider hiring a residential home appraiser in Toronto or wherever your home is located. You want to ensure you have the proper value for your home before making the switch. Without knowing the fair market value, you could be blindsided with a large tax bill.
As you go through the process of switching your primary residence to a rental, you will come across a few terms you might not understand. One of those terms is Deemed Disposition.
What is Deemed Disposition?
If you start researching the implications surrounding turning your primary residence into an income-generating (rental) property, you will likely come across the term deemed disposition.
According to TaxTips.ca, deemed disposition of property is, “A capital gain or loss normally only occurs when a property is actually sold. However, there are instances where a property may be deemed to be sold. That is, you must treat the situation as if you have actually sold the asset at fair market value (FMV).”
They go on to provide different examples of how deemed disposition works, including for change in use of the property. If you plan to change your primary residence into a rental property, it’s considered a change of use. In this situation, deemed disposition means you have to treat the property as though it was sold at the fair market value. However, in this type of situation, there are some special rules for determining what the fair market value is. The best way to determine the fair market value of your property, in this situation is by hiring a residential home appraiser in Toronto or the location of your home.
Why Do I Need a Professional Home Appraiser?
When you plan to go through a change in use for your primary residence, it’s necessary to hire a residential home appraiser in Mississauga, Toronto, Oakville, or wherever you happen to be located. The right appraiser will make a big difference as you go through this process.
Even if you didn’t have an appraisal done at the time of the change in use, it’s not too late. A professional appraiser can provide an appraisal based on the date of the change in use, even if the date has passed. The Canada Revenue Agency (CRA) does fair market value appraisals after the fact quite often.
You might think you can rely on the real estate agent’s report, but this will likely not hold up. The CRA will recognize an appraisal from a licensed residential home appraiser, however.
With a professional appraiser, you won’t have to worry about the CRA coming back to challenge the value of your home. You will be able to avoid any chargeback taxes and penalties since the CRA accepts fair market value appraisals from professional home appraisers.
How an Appraisal Helps Determine Capital Gains Tax
When you originally purchased your investment rental property, you probably expected it to appreciate in value and it probably did. A change in use for the property is treated like you sold the property for the fair market value as a rental property back to yourself. You must pay capital gains taxes on the difference between the amount you originally paid and the current fair market value.
The good news, if you owe money in this situation, it means you’ve made money on the value of the home. Capital gains tax from the CRA is half your marginal tax rate, which makes it one of the more favourable taxes. Paying the tax isn’t the main problem for most people. It’s figuring out how much needs to be paid.
Hiring a residential home appraiser will give you the right fair market value for your calculations. The appraised value will help you to understand how much your property is worth compared to the amount you paid for it. This gives you the amount you will pay capital gains taxes on when you subtract the cost of the home from the fair market value.
Using a Principle Residence Election to Defer Taxes
When converting your principal residence into a rental property, you will be subject to the change in use rules. These rules treat the situation as if you sold the property for the fair market value, which could result in a capital gain.
Using a Principle Residence Election or PRE, you can eliminate or reduce the amount of taxes paid on the capital gain. Filing a special election effectively deems the change in use from a primary residence to income property to have not occurred until you actually sell the property.
This election allows the homeowner to designate the property as a principal residence for another four tax years, even though it’s being rented as an income property. An article from advisor.ca breaks down how the PRE works and how it can help shelter taxes on capital gains when switching your primary residence to an income property. Even in this scenario, it’s important to get an appraisal done. You will need to know the fair market value of the home when the change in use occurs, even if you use the PRE to shelter taxes.
Hiring a Licensed Residential Home Appraiser for Your Situation
Anytime you want to make a change in the classification of your property, an appraisal is a good idea. Knowing the fair market value will help you determine the taxes you might need to pay now, or in the future.
It’s important to hire the right residential home appraiser for your specific situation. You need a licensed appraiser with plenty of experience providing fair market value appraisals.
Make sure you check the credentials of the appraiser you plan to hire. Whether your property is located in Toronto or Oakville, the right appraiser will ensure you get an accurate fair market value appraisal for your property.