Lifestyle | Should you sell your triplex fast?


With the new rate of capital gains tax on second homes, a young family is wondering if they should sell their triplex.




Situation

Jean-François* and Marie-France*, 32, bought a triplex in 2018 to live on the ground floor. When the family grew, they moved to a house in the suburbs in 2022.

Jean-François and Marie-France have a serious question: should they sell this triplex or not?

As mortgage rates rose, their monthly payments doubled because they took out a five-year variable rate. As for the net rental income, it has melted away and is approaching zero.

“The value of the triplex increased after the renovations we did, but also because of the upswing in the market,” explains Jean-François. If we sell it now with our respective salaries, the tax we will have to pay on the capital gain will be very high.

“The idea of ​​having to pay the equivalent of my annual salary in taxes worries me and I wonder what our options are,” he continues. I understand that there is no perfect option. »

Another option, according to Jean-François, would be to wait until retirement to have a lower income and pay lower taxes. However, waiting another thirty years is less attractive for him, since he will have to manage the tenants during this entire time.

Before the baby arrived, the couple enjoyed managing tenants and maintaining buildings. However, we must admit that their priorities have changed. Unforeseen events related to the triplex create stress, notes Jean-François. Then there are the grandparents who will all be retired soon. Jean-François and Marie-France want to have free time to enjoy all these beautiful people while they are still healthy and they also want to expand their family.

“A third option would be to take a sabbatical, reduce our income and sell that year,” says Jean-François. But is it a feasible strategy? The concept of a gap year is not a dream or a goal for me. I like to work,” he says.

Jean-François also co-owns the second triplex inherited from their parents with his brother. His brother wants to keep it, but would be open to selling it if a good offer came along. The market value of the triplex is estimated at $900,000 and the mortgage balance is $490,000. Jean-François’ share is $245,000.

The net rental income from the brothers’ triplex is also close to zero due to rising interest rates.

Numbers

Jean-Francois*

Salary: $120,000 with a target bonus of 10%
TFSA: $67,000
RRSP: $160,000
Unused RRSP: $23,400

Marie-France*

Salary: $142,000 with 20% target bonus
RRSP: $50,000
Unused RRSP: $52,400
TFSA: $64,000
RESP: $4,000

House, price in 2022: $480,000
Current Value: $700,000
Approximately $150,000 invested in renovations in 2022
Mortgage: $642,350 (6.2% variable rate)

Triplex, 2018 price: $460,000
Current Value: $850,000
Renovation cost: $80,000
Rental Income: $4,500/mo

Triplex, with brother price in 2018: $450,000
Current Value: $700,000

Analysis

Pierre-Raphaël Comeau, Senior Advisor, Financial Planning, Laurentian Bank Securities, Financial Services Firm, analyzed the file.

The financial planner wants to solve the issue of Jean-François’ unwanted sabbatical from the start. While many people dream and plan for this project, Jean-François says he enjoys the work.

PHOTO MARCO CAMPANOZZI, LA PRESSE ARCHIVE

Pierre-Raphaël Comeau, Senior Advisor, Financial Planning, Laurentian Bank Securities, Financial Services Firm

“Our money must be managed in accordance with our life goals and not the other way around,” says Pierre-Raphaël Comeau, who advises against taking a sabbatical year “by force” to save taxes.

The goals of young people in their thirties change, as do many couples throughout life. Has family become a priority? We make decisions based on that.

Possibility of sale

“I’m not a real estate expert,” recalls the financial planner. My goal is not to debate which is a better long-term investment.

“Because real estate can be a great investment,” he continues. However, it has its specifics, such as finding the right building, tenants, rent management, repairs and maintenance. The gentleman claims that it all stresses him out and deprives him of quality time with his family. The option of selling then seems like an obvious choice. »

Jean-François is also the co-owner of the second triplex. The risk of his investments is thus diversified, he emphasizes.

If he were to sell the triplex he owns with Marie-France, Jean-François would not have to pay a year’s salary in taxes, the financial planner estimates. “That’s close to half his annual salary. »

The couple invested $80,000 in renovations when they bought the building in 2018. The financial planner suggests checking with an accountant to see if it is possible to add that $80,000 or some of that back to the cost of capital.

“There are renovations that will increase the price you paid for the building, such as adding a room, and that will reduce your future capital gain. There are others that reduce the profit you make on rental income, such as re-roofing,” explains Pierre-Raphaël Comeau.

According to the planner, the tax due would range between $63,000 and $77,000, depending on the amount of renovations that may or may not be added to the purchase value of the triplex.

The new capital gains threshold of $250,000, which increases the inclusion rate to 66.7%, applies per year and per person, recalls Pierre-Raphaël Comeau. “We would need a profit of $500,000 on the triplex. »

If the renovations did not qualify for an increase in the purchase price of the triplex, the building would have to be sold for $1,090,000 to break even on the $500,000 profit ($250,000 each). And it’s only a fraction (66.7%) of the portion that exceeds $1,090,000 that would be taxed, the planner clarifies.

Spouses will also have a principal residence exemption equal to 33% of the triplex because they lived there between 2018 and 2022. The capital gain for those years will be calculated on the portion that was rented out.

And other options?

Aside from the sabbatical year, is there a more tax-advantaged time to sell? The planner checked to see if the sale of the building had miraculously happened the same year the second child was born. Marie-France would then have a lower income on parental leave. Savings? From $2,500 to $2,700.

One thing is for sure, Marie-France, Jean-François and her brother must avoid selling two triplexes in the same year because the $250,000 per person limit would be exceeded.

If the couple goes on to sell the triplex, the planner recommends putting some of the profit into an RRSP. With contributions of $23,400 for Jean-François and $52,400 for Marie-France, the tax savings will be $11,750 and $26,300, respectively.

If the building were a long-term investment, RRSPs would also be tax-free, believes Pierre-Raphaël Comeau.

He also suggests that the couple max out the RESP at $2,500 a year to get the 20% and 10% subsidies from the two governments.

The remaining amounts could be put into a TFSA while waiting for other projects.

The family has good savings habits, a good income and is well on its way to retirement.

However, he recommends checking to see if life and disability insurance meets their needs, since their most important asset is their ability to work.

The original version of this text has been edited to correct that the increase from 50% to 66.7% is the inclusion rate, not the tax rate.

* Although the case highlighted in this section is real, the first names used are fictitious.





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