Homeowners may not realize it at the time, but renting out a home they used to live in will change its tax status when you go to sell it later. By making a primary residence a rental property, capital gains taxes will come into effect and be based on the increase in property value when you go to sell it. There are ways to continue to assess the property as a primary residence provided certain conditions are met. If you don’t qualify, then you’ll need to calculate the capital gain or loss using the fair market value when the home was converted from a principal residence to a rental property. This means any acquisition costs such as legal fees and land transfer tax, which would normally be added to the adjusted cost base or tax cost for capital gains purposes wouldn’t apply.

Key Takeaways:

• Under subsection 45(2) of the Income Tax Act, it’s possible to treat a rental property (which was your residence) as your principal residence for up to four years provided you meet several conditions.
• Selling costs, like legal fees and real estate commission, are deductible expenses, and will reduce the overall capital gain when selling a house.
• If depreciation (capital cost allowance) were used as a tax deduction against net rental income in previous years, then these deductions are added to your income in the year or sale.

“When you convert a home that is your principal residence into a rental property, this is considered a change in use. You are deemed to dispose of the property at the fair market value at that time, and immediately reacquire it.”

Read more: https://www.moneysense.ca/columns/how-to-calculate-rental-property-capital-gains-and-losses/