Selling Rental Property

Hi Dave
You advised recently that deduction of rental property mortage interest(s) is Kosher only if you realistically expect to realise a positive cash flow from rental income within a reasonable span of time.

With the cost of an average house or condo nowadays, a mortgage would have to be payed down alot for the rent to actually provide a surplus.

What if it never produces a positive cash flow and you just sell it? Will the years of claimed deductions come into question?

What if you move into it upon retirement? Will you be accused of never intending to realise a positive cash flow?

david ingram replies:

If you bought an apartment to move into in five years and the projected rental cash flow upon purchase showed negative every year, you would not be allowed to claim the rental loss in the interim.

If you bought a rental profit to movie into in 15 years and it projected rental losses for seven years and a rental profit for eight, you would be allowed the rental losses even if the actual projection became wrong and you actually lost money for 11 years.

If you bought an apartment as an investment to sell at a profit and rent it out in the meantime as a method of helping with the payments, any losses are NOT deductible because you did not buy it to rent but to sell for a profit at a specific time.In addition, any profits on the sale would be subject to straight income taxes, not capital gains.

If you bought an apartment to rent out for ever and were forced to sell in 3 or 7 or 10 years because of outside circumstances, the rental; losses would be deductible and any profit on the sale would be taxed at Capital Gains rates.

Obviously, there is something in between. However, 'Anything' you buy for personal use or eventual personal use is subject to restrictions on the amount of rental loss you can claim as a deduction against other income.

Goto and read the rental income section in the TAX GUIDE in the top left hand box.