The situation
Évelyne* lives alone in her condo and has no children. She met Philippe*, who lives in her semi-detached house. The new couple does not intend to go looking for a new family nest. Évelyne simply wants to move to her chum.
“It’s my first and only property,” Évelyne wrote to us. Would it be better to sell my condo and profit from this money? Or rent it and take advantage of this new inflow of money? »
Before making her choice, Évelyne needs someone to help her understand the tax impact of her decision. Because at first glance, we can only imagine hypotheses and let ourselves be influenced by everyone’s unverified beliefs.
Évelyne still has a good income. Will she change the tax rate by adding those for renting the condo? Because in the current market, she could rent it for $3,000 per month.
“And then what are the other advantages of selling versus renting? » she asks herself.
It should also be noted that Évelyne is a 75-year-old retiree. Getting into property management or carrying out real estate sale-purchase operations (flips) is not part of his plans. His investment horizon on the stock market has also narrowed.
Numbers
PAINTING
Market value of the condo: $650,000
No mortgage
Income declared in 2022: $99,000
Employer pension: $6,000 per month
RRQ and PSV: $10,000
TFSA: $65,000
RRIF: $365,000
Analysis
Brigitte Felx, financial planner and senior regional director, corporate distribution strategy, global asset management at the Royal Bank of Canada (RBC), ran four scenarios.
PHOTO MARCO CAMPANOZZI, LA PRESSE ARCHIVES
Brigitte Felx, financial planner and senior regional director, corporate distribution strategy, global asset management at the Royal Bank of Canada
“You have to take age into account,” she says. At 75, you are established, but you don’t take as many risks as when you have a horizon of work ahead of you. The exercise should be done according to the age and goals of the person. »
What if she sold the condo?
Let’s assume she gets her prize: $650,000. “Who says sale says investment. We are going to invest the value,” explains Brigitte Felx.
“Given her age, she has a safe investor profile. The IQPF suggests working with yields of 3.2%, inflation of 2% and a life expectancy of 95 years,” she recalls.
Evelyne’s current marginal tax rate is 41.12%.
In the first sales scenario, it only takes the investment income and leaves the capital invested.
“It’s a scenario similar to rental, because it collects income. With the 3.2% return, she obtains $20,800 in annual income which is added to her $99,000 for a total of $119,800 in taxable income. »
The marginal tax rate increases from 41.12% to 45.71%.
In the second sale scenario, Évelyne will use the entire $650,000 over 20 years, capital and interest. At age 96, the proceeds from the sale of the condo will be consumed.
“She will have $33,482 per year more, indexed at 2% per year, which she can use for health care, a little luxury and perhaps travel. »
I invested her capital in guaranteed investment certificates which earn interest, which means she will be taxed on investment income.
Brigitte Felx, financial planner and senior regional director, corporate distribution strategy, global asset management at RBC
The marginal tax rate remains at 45.71%.
In the third sale scenario, Évelyne decides to have estate planning even if she does not have children. She could make special bequests to family members or to charities. The retiree would then invest the $650,000 without ever touching either the capital or the income.
In 5 years, the portfolio would reach $742,400 and in 10 years, $829,000.
“However, she must still declare her income, even if she does not take the money,” specifies Brigitte Felx.
The marginal tax rate remains the same at 45.71%.
What if she rented her condo?
When we do an analysis like this, we calculate the expenses that rental entails, maintains the specialist. Whether it is co-ownership charges, advertising costs, insurance, professional notary or lawyer fees, repair costs, maintenance and property taxes.
These are expenses that Évelyne can deduct from her rental income, which can rise up to 50% of the $3,000 rent.
With a taxable income net of expenses of $18,000, which is added to the $99,000, she reaches $117,000 in income.
Interestingly, his marginal tax rate is still the same as in all three sales scenarios.
Brigitte Felx, financial planner and senior regional director, corporate distribution strategy, global asset management at RBC
“We have just realized that from a tax perspective, there is no difference between selling and renting your condo,” insists Brigitte Felx.
The list of the hesitant landlord
For Évelyne, the real issues lie elsewhere. Brigitte Felx has drawn up a list. These are questions that Evelyne must ask herself, but also anyone caught in this dilemma.
The advantages of renting? She keeps her building which will increase in value over time. In the event of separation, she can return to her condo. If she sells it, she may not find the same type of property again, because the market changes and evolves.
“It is perhaps this aspect which could encourage him to rent it,” suggests Brigitte Felx. She could certainly buy another one if she keeps the money from the sale, but will she find exactly what she wants? »
As she is 70 and over, she can take back the condo even if her tenant is also 70 and over. The law prohibits landlords from evicting tenants from this age. If she were 60 years old, this is something she would have had to consider.
The disadvantages of renting? Find the right tenant who will pay; responding to the incessant demands of a stressful tenant; the possibility that the condo will depreciate due to the market, major work to be done or maintenance; the fact that this real estate asset is not liquid in the event of an emergency.
Évelyne must above all think about these two big questions: does she have the resources and capabilities to meet the needs of a tenant? Is she looking for peace of mind?
“It is these human factors which will contribute to making her make a decision, which only she can make and not the planner,” concludes Brigitte Felx.
Before packing your boxes to move to your chum, Évelyne absolutely must resolve four important matters. Another list that anyone moving in as a couple should make: a cohabitation contract, an inventory of each person’s needs at the time of the move, a protection mandate and a will.
* Although the case highlighted in this section is real, the first names used are fictitious.