SELLING YOUR RENTAL PROPERTY
S E L L I N G YO U R
RENTAL PROPERTY
BY: BENJAMIN JACOBS, CPA
O
wning a rental property can
be a rewarding and profitable
undertaking. When the time
comes to retire, after years
of meeting tenants and
maintaining the property, the last thing
anyone would want is a surprise on the
way out.
initial renovations, etc.) are reported
as its adjusted cost base (ACB). Future
capital additions are added to this base as
well (for example, the installation of an
air conditioning system). This represents
the capital cost of the property and the
CCA is calculated as a percentage of this
amount, representing the depreciation
expense each year of the property. The
CCA claimed is deducted from the ACB,
leaving an undepreciated capital cost
amount (UCC).
Throughout the years of owning your
rental property, you may have reported
an expense amount for depreciation,
or capital cost allowance (CCA). It is
often confusing to owners as to where
this amount comes from, and how it
is calculated, or whether it should be
claimed at all.
The benefit of using this expense each
year that it reduced your rental income.
It cannot create a loss situation for the
rental but can reduce the income to
nil. This sounds great, but claiming this
expense isn’t all upside.
When a rental property is purchased, the
costs involved (property costs, legal fees,
HIGHER THAN ACB
PROCEEDS 400,000
ACB 300,000
UCC 200,000
BETWEEN ACB AND UCC
When you sell your property, these
balances are used to calculate the taxes
on the sale. If no CCA was claimed on the
property, the calculation is simple; sale
proceeds less ACB equals a profit or loss
that is treated as a capital gain. A capital
gain has preferential tax treatment as
only half of a gain is taxed as income.
This can become more complicated when
CCA calculations come in to play. There
are several possibilities for tax treatment
of the sale of a property. The following
table shows the different results from
selling a rental property originally
purchased at $300,000 and having
claimed $100,000 in CCA over the years
of ownership, leaving a UCC balance of
$200,000.
LOWER THAN UCC
250,000 150,000
300,000 300,000
200,000 200,000
RESULT
CAPITAL GAIN (50% taxable)
RECAPTURE (100% taxable)
TERMINAL LOSS (100% deductible)
100,000 (P-ACB)
100,000 (ACB-UCC)
-
-
50,000 (P-ACB)
-
-
-
50,000 (UCC-P)
As you can see, there is only a capital gain if the proceeds are higher than the ACB, and it is only a portion of the overall profit.
The recapture is fully taxable, as it is based on the amount of over depreciation CCA that has been claimed throughout the ownership of
the property. A terminal loss, on the other hand, indicates that the property was under depreciated.
Real life may be more complicated than the simplified situation above. Situations such as gifting a property, selling property at a
discount, or changing the use of a property can add complexity. It is always a good idea to seek out professional advice to ensure you are
ready for the outcome. +
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