With the new tax rate on capital gains on second homes, a young family wonders if they should sell their triplex.
The situation
Jean-François* and Marie-France*, 32 years old, bought a triplex in 2018 to live there on the ground floor. When the family grew, they moved to a suburban house in 2022.
Jean-François and Marie-France are seriously wondering: should they sell this triplex or not?
With the increase in mortgage rates, their monthly payments doubled, because they took the five-year variable rate. As for net rental income, they have melted and are close to zero.
“The triplex has increased in value following the renovations we have made, but also because of the rise 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 bothers me and I wonder what our options are,” he continues. I understand that there is no perfect option. »
According to Jean-François, the second option would be to wait until retirement to have a lower income and pay less tax. However, waiting another thirty years is less appealing to him, because he will have to manage tenants throughout this period.
Before the arrival of their child, the couple enjoyed managing tenants and maintaining buildings. However, we must admit that their priorities have changed. Unforeseen events related to the triplex generate stress, notes Jean-François. Then there are the grandparents who will all soon be retired. Jean-François and Marie-France want to have free time to enjoy all these beautiful people while they are still healthy and also want to expand the family.
“A third option would be to take a sabbatical year, reduce our income and sell in that year,” says Jean-François. But is this a feasible strategy? The concept of a gap year is neither a dream nor a goal for me. I love working,” he says.
Jean-François is also co-owner, with his brother, of a second triplex inherited from their parents. His brother wants to keep it, but he 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’ portion is $245,000.
The brothers’ triplex’s net rental income is also close to zero because of the increase in interest rates.
Numbers
Jean-François*
Salary: $120,000 with a target bonus of 10%
TFSA: $67,000
RRSP: $160,000
Unused RRSPs: $23,400
Marie-France*
Salary: $142,000 with a target bonus of 20%
RRSP: $50,000
Unused RRSPs: $52,400
TFSA: $64,000
RESP: $4,000
House, price in 2022: $480,000
Current value: $700,000
Around $150,000 invested in renovations in 2022
Mortgage: $642,350 (variable rate of 6.2%)
Triplex, price in 2018: $460,000
Current value: $850,000
Value of renovations: $80,000
Rental income: $4,500/month
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.
From the outset, the financial planner wants to resolve the issue of Jean-François’ unwanted sabbatical year. While many people dream of this project and plan it, Jean-François says he enjoys working.
PHOTO MARCO CAMPANOZZI, LA PRESSE ARCHIVES
Pierre-Raphaël Comeau, senior advisor, financial planning, Laurentian Bank Securities, Financial Services Firm
“Our money must be managed according to our life objectives and not the other way around,” says Pierre-Raphaël Comeau, who does not advise taking a sabbatical year “by force” to save taxes.
The goals of young people in their thirties have changed, as is the case for many couples over the course of their lives. Has the priority become family? We make choices based on it.
The option of selling
“I am not an expert in real estate,” recalls the financial planner. My goal is not to debate what is a better long-term investment.
“Because real estate can be an excellent investment,” he continues. But it has its particularities, such as finding the right building, tenants, managing rents, repairs and maintenance. The gentleman claims that all this stresses him out and deprives him of quality time with his family. The option of selling then seems to be the obvious choice. »
Jean-François is also co-owner of a second triplex. The risk of his investments is therefore diversified, he emphasizes.
If he sold the triplex he owns with Marie-France, Jean-François would not have to pay his annual salary in tax, estimates the financial planner. “That’s closer to half his annual salary.” »
The couple invested $80,000 in renovations when they purchased the building in 2018. The financial planner suggests checking with an accountant to see if it’s possible to add that $80,000 or part of that amount back into cost in capital.
“There are renovations that cause the price you paid for your building to increase, like adding a room, for example, and that reduces your future capital gain. There are others that reduce the profit you make on rental income, like redoing the roof,” explains Pierre-Raphaël Comeau.
Depending on the amount of renovations that could be added or not to the purchase value of the triplex, the tax payable would vary between $63,000 and $77,000, according to the planner.
The new threshold of $250,000 in capital gains, which increases the tax rate to 66.7%, is applied per year and per person, recalls Pierre-Raphaël Comeau. “We would need a gain of $500,000 on the triplex. »
If the renovations do not qualify to increase the purchase price of the triplex, the building would have to be sold for $1,090,000 to break through the gain of $500,000 ($250,000 each). And this is only a fraction of the portion that exceeds $1,090,000 that would be taxed at 66.7%, specifies the planner.
The couple will also have a principal residence exemption corresponding to 33% of the triplex, since they lived there from 2018 to 2022. The capital gain for these years will be calculated on the part that was rented.
And the other options?
Aside from the sabbatical year, is there a more tax-efficient time to sell? The planner checked whether the sale of the building miraculously happened in the same year as the birth of the second child. On parental leave, Marie-France would then have a lower income. Savings ? From $2500 to $2700.
One thing is certain, Marie-France, Jean-François and her brother must avoid selling the two triplexes in the same year, because the threshold of $250,000 would be exceeded.
If the couple goes ahead with the sale of the triplex, the planner advises placing part of the gain in RRSPs. With contributions of $23,400 for Jean-François and $52,400 for Marie-France, the tax savings will amount to $11,750 and $26,300 respectively.
If the building was a long-term investment, the RRSPs would also be so by growing tax-free, believes Pierre-Raphaël Comeau.
He also suggests that the couple maximize the RESP at the rate of $2,500 per year, in order to obtain subsidies of 20% and 10% from the two governments.
The remaining amounts could be put in a TFSA while waiting for other projects.
The family has good savings habits, good income and is on the right path to retirement.
However, he advises checking whether their life and disability insurance meets their needs, because their most important asset is their ability to work.
* Although the case highlighted in this section is real, the first names used are fictitious.