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I've owned rental properties for the last few years and have never deducted depreciation. This year I was going to revisit the issue as I know you can only depreciate the property "house" asset and not the land.

Can someone confirm or deny my two tax scenario's below..

Assume the HOUSE portion of the property was worth $100,000 at the time of purchase and the HOUSE portion of the sale was $150,000.

1) Do not depreciate.
I would be taxed on $50,000. However since it's investment only half that is taxable, I would have to pay $10,000 tax on the year of the sale.

$25,000 * .4 (tax rate) = $10,000

2) Assume the HOUSE portion of the property is depreciated over time to $50,000.

Since the house is depreciated over time I have to pay taxes on half of $100,000 (150,000 - 50,000) value of house on the year of the sale.

$50,000 *.4 (tax rate) = $20,000

However if I've depreciated the $50,000 which normally would have been taxed at 32% (yes I'm not in the highest tax bracket without the sale of this property :( ) That's a savings of 50,000 * .32 = $16,000

Even though this has a higher final payout to the government, my realized tax savings make it only $4,000.
20,000 (tax paid to the government) - 16000 (savings of tax revenue over time) = $4000.


Buy these numbers, it seems like I have done this ALOT sooner.

Can anyone confirm this?
 

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Discussion Starter #2
Question stage 2:

If you decide to depreciate your home each year you would claim a expense of $3636.36 ($100,000 / 27.5).

If I was to claim this amount, it would make my expenses greater then my revenue. Would the government allow you to claim a loss on rental income for 27.5 years? Or do you claim a lower amount?

If you claim a lower amount, how is this determined?
 

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I am going to have to take the time to respond to this more fully later, because I am out of time now. However, in general:

- the capital cost allowance is not depreciation. It is a *tax* concept which allows an owner to take into account the depreciating value of an asset. However, it is *not*, in fact, a reflection of the depreciated value, or the rate of depreciation, of an asset. (Although this may seem like a nitpicky distinction, it actually has practical consequences.)

- if you sell a property for more than its adjusted cost base after CCA (which is referred to as the undepreciated capital cost), you will be required to add back in the CCA to calculate the cost base upon which you pay tax.

The consequence of these two issues is that there is considerable "wiggle room" in deciding if and when to take CCA on a depreciable property. Whether you take CCA in any given year or at all will depend on your predictions about your tax rates in the current year and going forward (as well as your expected duration of ownership for the property).

If you take CCA in low-tax years, only to have it all added back in a high-tax year, you may end up worse off than if you had not taken it at all.

What CCA offers is properly thought of as tax deferral, not a tax deduction. The time value of money is also an important consideration in this discussion (hence how long you are going to hold the property and what you would do with the CCA refunds you realize).

Ask away if you have questions about any of this.
 

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Sorry. My original post is not clear.

"Recaptured" CCA is taxed as income, not used to adjust the cost base of a property on which CCA has been taken.

So whether or not you are better off taking CCA in a given year as opposed to being taxed on the entire gain all at once is a question which involves many factors, including your current and expected tax rates, the holding period for the investment, what you would do with the tax savings associated with claiming CCA, and your personal assessment of the time value of money (i.e., what discount factor you use).
 

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OK. I am just seeing your second post. You have more questions than I can really answer in this kind of format.

The short answer to your question about how CCA rates are determined is that more than likely the rate for your property is 4%.

The answer to the question about whether CRA would let you claim a loss for 27 years is no.

And whether you have a loss or not, if and when you sell the property at a gain, all the CCA is added back in and taxed as ordinary income.

You need some professional tax planning advice, beyond what you can get in this forum.
 
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