My question is: Canadian-specific
QUESTION: We rented out our house for six months until we moved back into
it. Upon moving back in I had to replace a couple of items including the
washer and a sump pump. Are these items tax deductible even though I did not
replace them while the unit was rented out?
Thanks
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david ingram replies:
The answer is no and is a real problem for landlords in your position.
You can rent your place out for any length of time while you are gone and
come back to more repairs to bring it back to your standards than the rent
received.
However, anything you spend after the rent is considered a capital or
personal expense and not deductible against current income since it was not
expended to earn current (i.e. rental) income.
If you are in the position where the house would be taxable for capital
gains, then the amounts could be considered deductible against the future
capital gains and you would accomplish this by keeping a running total of
what you paid for the house, what it was worth when you moved out and rented
it out and what you added to the cost of the house after renting it out.
Form T2091 is the Canadian form filled out to decide if you are taxable on
the house or not.
When you moved out of the house, you converted it to a business property.
When you moved it back in, you converted it back to a personal residence.
Believe it or not, if the house went up in value $10,000 in the six months
you were out of it, you owe capital gains tax on $5,000 unless you file a
declaration under section 45(2) of the tax act.
The declaration allows you to move out for up to 4 years without incurring
capital gains tax by filing a statement with your T776 rental statement.
The statement would say: "I hereby elect to declare the building at xxx
your street, your town, your province, Canada as my principal residence even
though I do not ordinarily inhabit it." This statement is good forever if
you are transferred out of your area and live in a rented place in the other
city and stay working for the same employer.
It is good for "four" years if you just want to try and live somewhere else
for a while.
It does NOT apply if you get married and move in to your spouse's home as an
example. In this case, you and your new spouse can claim your or your
spouse's home tax free but not both.
So, when you file your 2005 return and the rental form T776 to report the
rent, make sure you make the 45(2) election above.
If you want to follow up with a phone call, remember that I charge for phone
calls to my office BUT
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