Q: My mother purchased a house three years ago with the intention that my uncle would remodel it and that my sister would live in it while attending college. But before any real work could be completed, my uncle skipped town. My sister never moved in. The house has been vacant ever since. Recently, I moved back to Ontario and I’ve been working on the house part-time. My aim is to get it into good enough condition to sell. What I’d like to know is if the renovation expenses can be used as a deduction on the capital gains taxes that will be owed once the house sells? What line on the income tax form do claim these expenses?
— Reduce the taxes owed, Peterborough, Ont.
Ayana Forward is a certified financial planner in Ottawa:
Any renovations that qualify as capital expenses can be added to your adjusted cost base (ACB) and used to reduce your capital gain.
Capital gains are calculated in the real estate section of Schedule 3 of your income tax return. You would add any qualifying capital expenses to your adjusted cost base. Only the renovations that would be considered “upgrades” are eligible as capital expenses. So, anything that was replaced or repaired back to its original condition in the home would not qualify as a capital expense.
For more help in identifying what qualifies as a capital expense and what is a current expense, read the Canada Revenue Agency documentation.
Ayana Forward is a real estate investor who also holds the Certified Financial Planner (CFP®) designation. Ayana is fee-based Financial Planner with Ryan Lamontagne Inc in Ottawa, ON.
Romana King, senior editor and real estate specialist at MoneySense:
Yes. Expenses incurred to fix-up a house that was bought and sold as an investment are considered a tax deductible expense. However, I should point out that you cannot simply claim this expense against the profit of the home, as you don’t actually own the house.
When the house sells, it will be your mother who is charged and who must pay the tax based on the appreciated valued of the home. She can then deduct any expenses that were incurred to purchase and renovate the home, including legal fees, renovation labour, materials and realtor fees.
If you’ve been the person responsible for paying the costs to get the in good-enough condition to sell, you may need to discuss how to claim the sale and expenses on your mother’s tax return. For instance, you may want to reach an agreement with your mom that you are fully reimbursed all the costs of the renovation, once the sale of the house is finalized. Part of this agreement would mean handing over all the renovation receipts, which allows your mom to deduct these costs from the profit made on the sale of the home. For complicated solutions, or just to get precise advice, talk to a tax specialist, such as a chartered accountant.
As for the line where you would claim the profit or loss on the sale of a home, consider using Line 130 on the T1 General. Known as “other income” this line allows income-tax filers to report any “taxable income that has not been or should not be reported anywhere else on the return.” For more information, consider reading the T1 General Guide, or talking to the Canada Revenue Agency or a tax specialist.
Romana King is the senior editor and real estate specialist at MoneySense. She is also a licensed real estate sales agent. Follow her on Twitter (@RKHomeowner) or on Facebook. If you have real estate concerns or questions, please email Romana directly at [email protected] or call her on her direct line at 647-436-7123 or 604-366-9868.