We've often said that you don't pay taxes when you sell your principal residence. But when the transaction involves a cottage or an income property, what expenses can be deducted to reduce the tax bill that accompanies the capital gain?
A few questions on this subject landed in my e-mail box.
There is still some confusion on the subject, and not without reason.
This is a case of 50 shades of grey, and not the kind that gives you the shivers.
Maintenance or capitalization expenses?
First, Claude, whose duplex has increased in value by 50% in 15 years, is about to sell it. Once the deal is closed, half of the capital gain will be taxable.
He knows that he can deduct the costs associated with the transaction (notary, brokerage fees, etc.) from the profit. But what about "expenses incurred over the years to maintain the value of the building"? It lists: "The complete renovation of the bathrooms, the replacement of a gallery, the electrical system and plumbing?"
One must determine what type of expense is involved. On the one hand, there are those used for the maintenance and upkeep of the property, and on the other hand, those intended for the improvement of the building.
The former are deductible from rental income in the year in which they are incurred. Most of those listed by our reader belong to this category.
The second are "capitalizable".
In other words, they can be added to the acquisition cost of the building when calculating the capital gain. "For example, the cost of building a garage or adding a floor," says Dany Provost, director of tax optimization at SFL Expertise.
And the bathrooms? Gray! Depending on the extent of the work, disbursements may qualify as maintenance expenses or as capitalizable expenses. If the bathrooms were refurbished with materials and equipment equivalent to those they replaced, the bill goes on the maintenance expense pile. If they've been transformed into rooms worthy of a decorating magazine, which would be surprising for rental apartments, the renovation costs could fall into the other category.
According to Dany Provost, it's generally more beneficial to deduct in the year, so use maintenance expenses. "The principle is that it's better to defer taxes as long as possible," he says.
Now that he's in the process of selling his duplex, was our reader too late to deduct expenses from previous rental income? "He can have previous tax returns reviewed, but he should expect to be audited by the IRS," says Dany Provost.
What about the cottage?
In the case of a secondary residence, since we're not talking about an income property, we have to forget about deductions during the year.
The only question here is whether the costs of work done on the cottage over the years qualify as capitalizable expenses. If the answer is "no", they are not deductible at the time of resale. Point.
Reader Claudette, who owns a cottage, is wondering about this. She needs to change the septic system, which dates back to the construction of her cottage. Is it capitalizable? What about the roof, which must be redone?
Tax expert Michel Lavoie takes the example of two identical cottages. The first one needs the work listed by our reader, the other one has been refurbished. A buyer will be willing to pay more for the latter because he or she will not have to spend money on repairs. "The buyer does the math. At the end of the day, both have the same value to him, including the cost of the necessary work," explains the tax consultant and lecturer.
To capitalize an expense, you have to be able to show that the work improves the property and increases its intrinsic value. By refurbishing the roof with more luxurious and durable materials, and by insulating in the process, the costs can then reduce the capital gain.
Michel Lavoie does not split hairs. As soon as you replace something with something better that can provide value, it's capitalizable.
Source : Article by Daniel Germain on the website tvanouvelles.ca on the 10 September of 2021
Link : https://www.tvanouvelles.ca/2021/09/10/immobilier-que-peut-on-deduire-lors-de-la-vente
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