Lifestyle | Keep or sell my “urban chalet”?

Having just turned 70, Jacques* wonders whether he should keep or sell his condo located on the Plateau Mont-Royal, in Montreal.

The situation

When he bought his small condo in 2000, Jacques paid $50,000 for it. Today, the market value of the apartment located in a six-unit condominium is $300,000. In 22 years, he made a capital gain of $250,000.

Because the condo is not his main residence.

“For several years, with my partner, we used it as a pied-à-terre for our work, renting it out in the summer months to finance fixed costs, says Jacques. We are retired and only use it part-time from October to May as an “urban chalet” and for our cultural outings. It is no longer possible to rent it in the summer given the new regulations of the co-ownership. »

Jacques lives in the suburbs with his wife Nicole* in a house whose market value has also skyrocketed to $850,000.

The couple do not want to rent the condo for the year, because they do not want to have both the responsibility of a tenant and that of participation in the management of the condominium.

“The annual fees including condo fees, electricity, insurance, maintenance and contingencies amount to $7,000,” notes Jacques. It goes without saying that if I resell the condo, the capital gain will be high. »

“Considering the tax on the capital gain on sale and the fact that its value will continue to increase gradually, do you think that from an investment point of view, we would be better advised to keep it or to sell it ? »

The septuagenarian indicates that this asset is not essential to the financial security of his household and that in the event of a sale, he is very hesitant as to the choice of investment vehicle. Jacques and Nicole have a cautious investor profile. Their portfolio is 20% equities and 80% fixed income.

Advice

“I’m tempted to analyze the situation with a behavioral finance approach,” launches Antoine Chaume, financial planner and financial security advisor at Lafond+Associés, to whom we submitted the case of Jacques and Nicole.

Sentimental value and attachment to the property must be assessed.

“It’s a bit like having a chalet, where you buy a lifestyle,” continues Antoine Chaume. Should you keep your cabin or not? The reality is that you’ve been going there for 20 years, you know the people around the lake and you’re good there. It’s not a good idea financially to keep it, but you want it for your well-being and your mental health. »

Keeping this Plateau Mont-Royal condo, with its fixed costs of $7,000 per year, is not the best financial choice, says the expert.

In a context of inflation, real estate is a rather interesting refuge, indicates Antoine Chaume. However, without the condo, the couple would already have 45% of their real estate assets with their $850,000 primary residence.

If Jacques and Nicole want to keep the condo, but not rent it out, what could they do with the $300,000 tied up? Should they optimize available equity?

“As they are 70 and over, they are no longer in the value accumulation phase, but more in the stabilization or disbursement phase. I would therefore not choose the strategy of going for more money to buy more real estate. They are no longer there in their lives and they have mentioned that they do not want to manage tenants. »

“Should they transfer the condo to their children? This is a question that often comes up from parents with property that has increased in value, observes Antoine Chaume. Parents ask themselves: is it better to transfer the house from the living or wait until death? In general, it is more profitable to sell the property during one’s lifetime. »

The expert reminds in passing to put their papers in order, wills and mandates of incapacity. Upon death, RRSPs, RRIFs and TFSAs can be transferred without penalty to the surviving spouse.

How to deal with capital gain

It’s true that they are sitting on $300,000 in capital. It is also true that there will be tax payable on the capital gain. In this case, if the condo is indeed sold for $300,000, Jacques will have to add approximately $125,000 to his income, or 50% of the $250,000.

What can you do to reduce your tax bill? Since he only has two years left to make RRSP contributions, Jacques could use his remaining RRSP contribution space to reduce his tax for one year. “He will then be able to disburse his RRSPs transferred to RRIFs over several years, thus flattening his tax and remaining in lower marginal brackets,” suggests the financial planner.

To further lower the tax bill, the couple could take the opportunity to make donations to various charities and non-profits.

Sell ​​to invest where?

How to make the remaining sum work? First of all, the couple must absolutely maximize the TFSAs. But in which product?

“Do we put it in a 1.5% GIC? It is sure that it is not interesting, affirms the financial planner. However, since their investor profile is defensive, with 80% fixed rate and 20% equities, I have to give them a recommendation. »

Besides real estate, one of the ways to obtain good returns in an inflationary environment is to imitate the vision of institutional managers, he argues. Like some American universities, the Caisse de depot et placement du Quebec (CDPQ) and Teachers, the Ontario teachers’ pension fund, which are reducing their exposure to equities and traditional fixed income. They invest in “alternative assets”, such as gold, livestock, agricultural products, airports, toll roads and commercial buildings.

“We are hearing more and more about alternative assets to protect your assets. Through mutual funds or exchange-traded funds, we can have access to these alternative strategies,” explains Antoine Chaume.

For non-registered investments, the planner advises to go for products that pay capital gains or dividends rather than interest. The tax treatment is more advantageous.

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

Are you planning a project that requires a wise use of your money? Do you have financial problems?