The Tax Issue:
In 2002, my parents put their principal residence in joint tenancy with my husband and myself. We lived on the property for a period of time. We have, since 2002, contributed to repairs and upkeep. In 2005, my father died. In 2010, my mother died. We currently use the home as a seasonal property but we plan to rent it out a few weeks of the year in order to have it pay for its upkeep. What I am wondering about is Capital Gains Tax. I am sure our portion (or maybe all of it minus the costs incurred and that step-up thing?)is subject to it, however, is it only payable if the property is sold? Also, is the step-up determined from when we received our interests in the property in 2002 or when it was no longer my mom’s principal residence (because she died) in 2010?
Hey, as an aside…do you recommend claiming rental income from a seasonal vacation rental as “rental income” on a personal tax return or as “business income” on a personal tax return (I did register my husband and myself as a general partnership – if that matters)…you probably recommend that the time has come to hire an accountant, right? 😉
OK, let’s tackle the easy question first. You will only pay capital gains tax on the property when it’s sold.
Now, when your parents transferred the property to you in 2002, they had a deemed disposition at fair market value, so that your cost is equal to the value of the property at that time. If you have made any capital improvements since that time, you may add those to your cost.
When you sell the property, a portion of the gain may be exempt if you claim the property as your principal residence. That’s not such an easy decision to make. You can designate only one property as a principal residence in any given year, so if you owned any other residence, you may want to save those years for the property with the higher accrued gain.
Next, rental income must be reported as “rental income” not “business income”. There is no choice in the matter. Registering as a partnership doesn’t really change a thing, other than you’ve protected your partnership’s name, if any.
And finally, nothing beats a good accountant. They’re cute, warm and cuddly and yes, I do recommend you use one.