The question:
I own a condo I used to live in. When I lived there I borrowed against the equity to put a down payment on another condo. I wrote off the interest on the deposit until the second condo was built. Now I live in the new condo and rent the old one that I borrowed against. When I calculate my taxes, do I have to subtract the funds I used as a down payment from my calculation for total expenses?
Also, can I write off part of my new condo's mortgage interest and expenses because I use it as an office to manage my old, now rental, condo?
Thank you. TB
The answer:
Any time you convert one property from personal use to an income-producing purpose. things can get a little complicated. Let me share the highlights.
First, you asked about deducting interest on a mortgage on your new condo. Your new condo happens to be the place where you live – so it's not a rental property. As a result, you won't be able to deduct the interest on the mortgage used to acquire that property. Canada Revenue Agency always looks at the direct use of the borrowed money. If the borrowed funds are used for an income-producing purpose, you can generally deduct your interest. This is not the case in your situation. You can, however, deduct some expenses related to your rental property (your old residence/condo). These deductible expenses include condo fees, utilities, insurance, property taxes, advertising to find a tenant, and other costs, which would include mortgage interest if you had borrowed to buy the old condo. In your case, however, it sounds as though your only mortgage is on the new condo, which is your residence.
There's another tax implication here: When you converted your old condo to a rental property some tax rules called the "change in use" rules kicked in. These rules will deem you to have sold your old condo at its fair market value on the day you changed its use to an income property, and will deem you to have re-acquired that property at that same value. So, if that property had appreciated in value since you bought it, you may have triggered a capital gain when you changed the use of the property. Now, you can likely use your principal residence exemption to shelter that gain from tax (since it was presumably your principal residence) but you should visit a tax pro to be sure (and you'll have to report that "deemed disposition" on your tax return for the year this took place). You will now have a higher adjusted cost base (ACB) in that old condo given that you were deemed to have re-acquired it at fair market value.
Finally, the funds you used as a down payment on the new condo can not be deducted. Those funds simply form part of your ACB of the new condo you purchased. As an aside, I did write an article recently about a taxpayer that similarly converted a property to an income-producing property. You can read that article here.
With tax season is full swing, Globe Investor columnist Tim Cestnick is answering one reader question online each week in the runup to the filing deadline. Mr. Cestnick is president and CEO of WaterStreet Family Offices and author of 101 Tax Secrets for Canadians.
Please note that Mr. Cestnick will not be answering detailed questions about a person's individual tax returns. Preference will be given to questions with a broader scope.
For stories, videos and tips about taxes, be sure to visit the Globe Investor Tax Centre website for daily updates.
Tim Cestnick