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Renting out part of your new home may help cover some costs. But would it still be considered a primary residence? Or would it be subject to capital gains tax? Find out.
Would it be beneficial to open a first-time home buyer’s savings account if I was planning on buying a property soon, say, in 2023 or 2024?
If I purchase a house and live in the basement but rent out the main floor, would that still be taxed as capital gains?
Are there any investment taxes I would need to pay for renting a property? If so, is there an estimate to how much those would be?
Is rental income added to your annual income when you report taxes? Or does a business need to be created? Is there a benefit to either approach?
Are there any other costs I need to budget for?
—Priya
I will try to touch on everything you have asked, Priya.
The savings account you are referring to is a first home savings account (FHSA). If you open one and contribute up to $8,000—the maximum annual FHSA contribution limit—this year and again in the new year, you’ll have up to $16,000 of tax deductible contributions that can be withdrawn tax-free for the purchase of an eligible home. In this way, you may be able to turn that same $16,000 into $19,000 to $24,000 depending on your tax bracket due to the tax deductions associated.
According to the Canada Revenue Agency (CRA): “You must occupy or intend to occupy the qualifying home as your principal place of residence within one year after buying or building it” to take advantage of the FHSA withdrawal. As a result, a property you intend to live in and partially rent out could qualify for a tax-free withdrawal according to the FHSA withdrawal rules, but only if it is primarily used as your home and secondarily as a rental property.
Your home can be partially rented out, and you could still qualify for the full principal residence exemption meaning no capital gains tax on the future sale of the property if the following criteria apply.
CCA means depreciation. It helps you reduce the amount you would be taxed in the current year, but in the case of a property you want to qualify as your principal residence, the short term tax savings could cost you in the long run.
So, just be mindful, Priya. If you are renting out the upstairs and living in the basement, and the upstairs unit represents more than half of the square footage, you may run into a situation where some of the future appreciation of the property’s price is taxable.
Rental income is always taxable and rental expenses can be deducted against that income. Typical rental expenses include property tax, utilities, insurance, condo fees and maintenance. Mortgage interest and line of credit interest may also be deducted from income. If you are using part of your home for personal use and part for rental purposes, the personal use percentage is not tax deductible. So, you would need to prorate your expenses by square footage or another measure.
The tax rate for net rental income typically ranges from 20% to 50%, depending on your other sources of income, other tax deductions, and province or territory of residence.
You do not need to create a business to operate a rental property, Priya. The income and expenses are reported on your personal tax return. That said, be careful about having short-term rentals, like Airbnb, as this may give rise to “business income” activity. Short-term rental income in excess of $30,000 per year may require GST/HST registration. There may be other municipal taxes or levies that apply as well. And, there may ultimately be GST/HST implications on the future sale of the property or if the property is converted back to being solely for personal use.
As far as costs to budget for, Priya, new home buyers need to plan for:
The one-time and ongoing costs of home ownership can be significant. If you use all your savings for a home down payment and take out the maximum mortgage the bank approves you to borrow, it can leave you “house rich and cash poor.” It can be easy to get behind in debt and difficult to get caught back up.
In summary, Priya, the FHSA may be a good option for you. You may be able to use it even though you may rent out part of the home. Rental income needs to be reported on your personal tax return. But, it may have negative tax implications like capital gains tax and GST/HST payments, depending on the type of rental property and the extent of your rental usage. Home ownership is expensive, so try to plan ahead so you do not get blindsided.
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Hello Jason,
Your detailed responses to Priya’s questions are quite helpful.
I do have a follow up question regarding FHSA withdrawal rules, precisely the 2nd part of this rule:
” You’ll need a written agreement to buy or build a qualifying home before Oct. 1 of the year following the year of the withdrawal. This is provided the qualifying home wasn’t bought more than 30 days before the withdrawal.”
Please explain this. Also, can a qualifying withdrawal be made after occupying the home or must the withdrawal be made prior to buying the home or occupying it?
Best regards
For a home bought using funds from a FHSA, how long must one live in the property before the property can be rented out as a rental property (the whole property, not part of the property)?
Thank you.