Interest deductible on rental property
Renting out your former home and giving money to a relative in the U.S. were among the topics raised in the latest batch of reader letters. Here’s what they wanted to know.
Q: I have a principal residence with no mortgage and placed it for sale or rent. Eventually, it rented and I moved to a seniors’ home. Can the real estate listing be used to establish the value of the property for capital-gains purposes (since it stopped being a principal residence after I moved). Can I take out a mortgage on the property and deduct the interest to offset rental revenue? The funds from the mortgage will be used as downpayment for another rental property or to lend to a corporation investing in rental property.
A: Mathieu Ouellette, partner at accounting firm Bessner Gallay Kreisman, recommends a professional appraisal rather than simple real estate listing to support the assessed value at the time the property changed its vocation from residential to rental.
“Interest is deductible on money borrowed for the purpose of earning income,” he said, and that normally would apply for the purchase of a revenue property, making an interestbearing loan to a corporation or purchasing shares in a corporation that invests in rental properties.
Q: Next June, I will have excess funds and I wish to give my three children $50,000 each. I assume there is no problem with the two residing in Canada, but what about my son in the U.S.? Any potential complications with the IRS?
A: As you indicated, gifting money to family in Canada has no tax consequences. It can be trickier for a U.S.based recipient, whether a green-card holder or a U.S. citizen. If only a temporary visa holder, however, it’s possible he may not be considered a U.S. resident for the gift-tax issue.
Cross-border tax expert David Altro of Altro Levy LLP says that if your son is a Canadian resident living in the U.S. (rather than a U.S. citizen or green-card holder), there should be no problem, but he suggests making the gift and depositing the money in a bank account in Canada. “In that way, it isn’t a U.S. gift, thus avoiding any possibility of the IRS taxing the donor on the gift.” The funds can then be transferred tax-free from your son’s Canadian account to his U.S. bank account.
Q: My sister-in-law retires next year at age 65. Her income will consist of Canada Pension Plan and Old Age Security cheques totalling about $12,000. Her tax credits should be about $19,000. If she withdraws $4,000 from her Registered Retirement Income Fund (RRIF) and does a pension-income split with her husband, can she then transfer the pension credit to him, since she won’t need it?
A: Jamie Golombek, managing director of tax and estate planning for CIBC Private Wealth Management, says the tax rules state that if a spouse or partner’s personal amount, age amount, dependant children amount, pension income amount, disability amount and tuition/textbook/education amounts exceed his or her taxable income, the excess credits can be transferred to the other spouse or partner.
“So in this case, your sister-in-law’s husband could effectively use her $2,000 unused pension income amount, regardless of whether or not he actually reports any pension income that year,” Golombek said.