If you’re like me, you’ve probably watched the show ‘Income Property’ on HGTV. If you haven’t I’ll give you a quick synopsis: Scott McGillivray is a Real Estate Investor and Contractor and is the host of the show. Scott leads home owners, who would like to convert part of their home into an ‘income property’, through a series of steps from renovation to renting. Typically the home owner will convert a basement into an in-law suite and after a few weeks the space is fully finished and ready for tenants.
So what does this have to do with tax laws and you?
Any time you convert a non-income property into one that produces income, the government will deem that you have sold your property, or a portion of it, and you can be taxed accordingly. This becomes especially tricky if the property has increased in value. If that’s the case, you may have to declare capital gains.
This even holds true if you are renting out your cottage for the summer or if you are only renting a single room or if you convert part of your home into a business space. Scary stuff right?
But don’t be too alarmed. There is an exemption!
First of all, you may be able to get around the capital gains issue and avoid the tax hit if you declare the income property as your principal residence.
The next part may also help with a tax exemption. You can declare that the property is only a partial change and the income-producing purpose is necessary to support the primary use of the property. The next exemption point is that no capital cost allowance is being claimed on the property. The last point is you can indicate that there is no structural change to the property.
One last opportunity for tax exemption is if you defer the capital gain to a future year. This is only possible if you have completely converted the property into an income property. You will still be allowed to claim the property as your principal residence for up to four years after you’ve changed its use to earn income.
There are certainly benefits to creating an investment property but be aware that there are some potential tax roadblocks you may have to go through.
If you would like to check out the original article from The Globe and Mail you can find it here.