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The Housing Report
The Duplex: one option for empty nesters
Even if the children have flown and maintaining the family
home has become a hassle, some couples refuse to move to a
rented apartment or a condo in the clouds. They're loathe
to leave the garden and say they're happier in a place that
"feels like a house."
For such people, a duplex may be ideal. It allows them to
live in smaller quarters, perhaps remain in an older, established
neighbourhood and to benefit from rental income, as well as
substantial tax deductions.
The mortgage-free family home is often a couple's biggest
asset, but it brings them no current income and may become
source of worry when they travel, leaving it dark and empty.
In buying a duplex, they exchange a house for two separate
residences, one of which will be their home and the other
a rental property.
Duplex owners pay property tax, heating and utility bills
for both units and deduct the rental unit's expenses from
the income they receive, says Murray Pearson, a tax partner
with Ernst & Young in Toronto. They can also deduct part
of upkeep costs such as repainting, re-roofing and repairing
the building, as well as garden maintenance and snow removal.
Mr. Pearson adds that only repair and maintenance expenses
may be deducted in this way, not expenditures made for improvements
or renovations. "If the units are roughly the same size,
an owner would deduct about half of these costs from their
rental income."
Duplex owners also claim a yearly depreciation deduction,
equalling 4 per cent of the estimated original cost of the
rented portion of the building - not the land - says Mr. Pearson.
A realtor or insurance agent often estimates the dollar value
of the building alone at the time the owner bought it.
Here's how it works: If the estimated, original cost of the
building is $100,000 and the rental unit occupies half of
it, the owner deducts depreciation of 2 per cent of $50,000
(it's just 2 per cent in the first year, or $1,000) 4 per
cent of $49,000 ($1,960) in the second and 4 per cent of the
declining balance each year thereafter, Mr. Pearson explains.
If expenses and depreciation deductions are substantial, owners
may pay little or no tax on rental income.
But Revenue Canada swoops in at sale time. The duplex is
just partially a "principal residence," so part
of any capital gain - about half, if the units are the same
size - is taxable. And depreciation deductions claimed over
the years could also be recaptured and added to rental income
in the final year, if the selling price indicates that the
building hasn't really depreciated.
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