With property prices rising, owning a home and cottage makes a big difference to your total assets when you want to retire. But still it is necessary to be able to find a way to seek liquidity.
Posted at 6:00 a.m.
The situation
Louis* is self-employed and wants to retire in early 2023, when he will be 58 years old. He would like to rent his house in Montreal and go live for a few years in his country house. “That’s the only thing that’s clear to me right now,” he said. Eventually, I could sell the cottage to pay off my remaining mortgages and have some cash. I could then return to live in Montreal for ten years before selling my house. Or I could sell both properties and buy myself a more comfortable country house. However, he wonders whether he will have to pay capital gains tax on these properties when he sells them. “I know I avoid them if I declare the property I’m selling as my primary residence, but I don’t know the details,” he says. I’m at the time of the big questions and I would like to have advice to see things more clearly. »
Numbers
Louis, 57 years old
- House in Montreal: value of approximately $800,000, mortgage loan of $70,000
- Country house: value of approximately $250,000, mortgage of $40,000
- RRSP: $155,000 in guaranteed investments, $135,000 in mutual funds
- TFSA: $45,000 in guaranteed investments and $45,000 in mutual funds
- Unused RRSP contributions: $6,000
- Estimated house rental income: $2,500 per month
- Monthly pension from the Quebec Pension Plan (QPP) at age 60: $560
- Monthly survivor pension: $740, amount that will be adjusted at age 65 to approximately $500
- Cost of living at retirement: between $45,000 and $50,000
Advice
Sell, rent or remortgage
First, Simon Préfontaine, financial planner at Lafond Financial Services, points out that Louis has 1.32 million in total assets, 70% of which in real estate. “So he only has access to 30% of his assets and he has to find a way to get enough cash to retire,” he says.
If Louis decides to keep the 2 properties for the next 12 years, question of being able to walk between the city and the countryside after having spent two years at the chalet and having rented his house during this time, he could only have a lifestyle of ‘about $40,000 a year before exhausting its reserves, assesses the financial planner.
PHOTO HUGO-SÉBASTIEN AUBERT, LA PRESSE ARCHIVES
Simon Préfontaine, financial planner at Lafond Financial Services
As for the tax issue, he could designate his cottage as his principal residence for the total of the years he has lived there, even if it is for a very short time. Thus, he would not have to pay tax on the capital gain of the cottage for those years. “But, considering that he will be selling his house in the next few years, he should check with his accountant whether it is more tax-efficient to declare the chalet as a second home and pay tax on the capital gain, indicates Mr. Préfontaine. Thus, he would keep the house, which is worth more, as his main residence for as many years as possible to reduce the tax bill when it is sold. »
But, in addition to selling the chalet, Louis has other options to get the $5,000 to $10,000 that he would need more annually to live on for these 12 years. For example, he could rent out his cottage on occasion.
He might also consider getting a new mortgage for around $100,000. “People hate being told that, but it’s a way of getting liquidity rather than leaving money within the walls of your property,” explains Mr. Préfontaine. In the case of Louis, who has no children and for whom bequeathing an inheritance is not something important, he has no advantages in leaving so much money in his property. So he could get out and live with that money. »
The financial planner stresses, however, that it would be best if Louis, who is self-employed and nearing retirement, first checks with his bank or a mortgage broker that he might qualify for a mortgage. “If it’s going to be complicated, he could decide to apply for the mortgage while he’s still working, or in the first year of retirement because the financial institution will be looking at his last two tax returns,” he said. he.
After 12 years, however, Louis will have to sell his house in Montreal to get more cash.
Review investments
Without having the details of Louis’ portfolio, Simon Préfontaine made his forecasts taking into consideration that his mutual funds were balanced with a return of 4.8% per year.
“But I find that a large part of his portfolio is in guaranteed investments, indicates the financial planner. It is certain that this hurts his performance, but also, since this money is frozen, he cannot take it out when he needs it. »
He would therefore advise Louis to complete his investor profile. “If, in the end, he can keep his peace of mind by placing all his savings in a balanced portfolio, for example, the difference in return would be enormous,” he specifies. We’re talking about $5,000 a year after tax. »
* Although the case highlighted in this section is real, the first name used is fictitious.