QUESTION:
Hello,
I purchased a home(legal duplex) in March 2003. I completed some
renovations and rented the entire property out in June of that
year. In 2004 I submitted the election 45(2) with my 2003 Tax
Return claiming it as my principle residence.
My question is: I am unclear as to the specifics of the 3/4 year
rule. Must I move back into the home within 3 years, and reside
there for at least 1 year to defer capital gains if/when I sell
it. Or is it anytime within 4 years...?
Also: if I move back into one unit, how will renting the other
unit out affect the capital gains issue when the home is sold? Do
I need to submit the 45(2) election with my tax return each
year?(I don't own any other property at this time).
Thank you, and I do appreciate any help/advice you can provide...
Kind regards,
xxxxxxxx.
=================================================
david ingram replies:
As described, you would not likely be eligible for a 45(2)
election as it sounds like you did not buy the house to live in
it and were only there long enough to finish the renovations.
To qualify as a principal residence you must have bought the
house to live in, not rent out.
The 45 (2) election is designed for people to rent out a house
that they have regularly lived in when their circumstances
change. It allows them to rent out their house for up to four
years without paying capital gains tax on any increased value
while they are transferred for a couple of years, attend school
in another area, go back to their home town to look after a sick
mother, etc.
It is NOT designed for someone to buy a house, live in it for 2
months and rent it out tax free for four years.
Now, I take it all back if, in fact, you bought the duplex and
then were transferred out of the city. On the other hand if you
were transferred out of the city, there is no four year rule.
The exemption applies for as long as you are transferred and
continue to work for the same company and do not buy another
house. If you do buy another house, you get to claim one of the
other (not both) tax free.
And, in my opinion, the whole duplex can be tax free if you did
in fact live in it as a real personal residence. i.e. moved a
house full of furniture in and did not keep your basement suite
somewhere else while you were fixing up the building.
Goto www.centa.com, click on Tax Guide on the left hand side and
read the capital gains section - in particular the Fedel
Sacomanno case where he sold a TRIPLEX tax free.
As for moving back in, you do not have to move back in with a
legitimate 45(2) election.
To see how the form works, goto the CRA website at www.cra.gc.ca
and read the Form T2091 at
http://www.cra-arc.gc.ca/E/pbg/tf/t2091_ind/t2091-ind-04e.pdf
The worksheet for the T2091 can be found at:
http://www.cra-arc.gc.ca/E/pbg/tf/t2091_ind_-ws/t2091-ind-ws-04e.
pdf
David Ingram's US/Canada Services
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Specialists
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New email to davidingram at shaw.ca
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