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Video instructions and help with filling out and completing Who Form 4797 Allowance

Instructions and Help about Who Form 4797 Allowance

Hi there I'm Peter Russell from super tacks welcome to another one of my video blogs today's discussion is a walkthrough of an example of a capital gain upon disposition of a rental property here in Canada now essentially individuals get involved with rental properties to earn rental income and eventually earn a capital gain upon disposition of that rental property now net rental income is generally your rental revenue earned less rental expenses rental expenses such as property taxes paid mortgage interest paid utilities and repairs and maintenance those are the general ones you're going to come across now you can also take what is called CCA or capital cost allowance that is basically the write-off of the cost of your rental property over time now how we do this is we set up the asset in what is called a class now rental properties are generally put in class one for tax purposes here in Canada class one means that your decline you are you are writing off the asset at a declining rate of 4% per year now here in Canada we have something called the half-year rule which means you only take half deceased half of the depreciation in the first year that you generally would so in this example if our rental property had a value of $300,000 and we take 2 percent the first year and then 4 percent on the 300,000 less 2% for the second year I'm going to show you how this works in my example because this this will help explain to you a topic which is called recapture which is involved in the calculation of the capital gain of a rental property now let's go visit my big board here where we have an example gains on rental properties ok for my example we're going to assume the taxpayers name is John and John bought a rental property like a house somewhere for $300,000 let's assume it's a in Toronto ok so he bought a house in Toronto and he started to rent it out in 2022 and he paid three hundred thousand dollars for that house in Kurt legals of $2,000 and land transfer tax at 304 thousand dollars giving him an adjusted cause base of that value for example three hundred and six thousand dollars now I told you you can take CCA on this rental property but you can only take CCA on the portion related to the building there's a land portion a land portion relating to this property so we're going to assume the land is worth eighty percent twenty percent of the three hundred and six thousand and the building or the actual home is worth eighty percent so 80 percent building is two hundred and forty four thousand eight hundred dollars and land portion is sixty one thousand two hundred dollars now say for three years John earned quite a bit of rental revenue had minimal expenses and he had plenty of rental income so he decided to take CCA each of those three years so the CCA he would have he would have earned are been able to deduct in two thousand eight would be four thousand one eight hundred ninety six dollars which is essentially two percent of two forty four eight hundred in 2022 it would increase to nine thousand five hundred ninety six dollars which is basically two hundred and forty four thousand eight hundred less four thousand eight hundred and ninety six dollars times four percent which would give you nine fifty nine six and then we do the same thing in two thousand intent to get another deduction of nine thousand two hundred twelve dollars now I've said here all three amounts taken for CCA adds up to twenty three thousand seven hundred and four dollars that is what's going to be called recapture I got to tell you why so he's John is going to end up selling this property in 2022 for four hundred and fifty thousand dollars he's hearing Commission's Hirscher he paid Commission's of twenty two thousand five hundred paid legals of two thousand dollars net proceeds of four hundred and twenty five thousand five hundred dollars for this example so that is definitely larger than the three hundred and six thousand dollars he paid for that property so he's definitely gonna have a capital gain here but he also has recaptured he deducted the CCA 408 - Oh 10:00 he now must take that amount back into income on line 126 of the tax return twenty-three thousand seven hundred four dollars now he also has a capital gain to worry about here he's got a capital gain on on the land which works out to four hundred and twenty five thousand five hundred dollars times twenty percent less our worked out value of his ACB for the land of sixty one thousand two hundred dollars giving him a capital gain on this calculon this disposition of twenty three thousand nine hundred dollars now for the building we calculate the gain on the building four hundred and twenty five thousand five hundred times eighty percent less the ACB of the building portion eighty percent to forty four eight hundred gives you a capital gain on the building of ninety five thousand six hundred dollars now if I bend a little down a little more now we can see the taxable capital gain which is you add the two amounts together 26 nine plus ninety five six times fifty percent which works out to fifty nine thousand seven hundred and fifty that would be his taxable capital gain on the disposition of this rental property in 2022 so that is picked up on line 127 which is taxable capital gains of your t1 General Canadian income tax return on top of that you have the recapture that that's being taken back into income which is line 126 for twenty three thousand seven.

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