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 in with her boyfriend.
“This is my first and only property,” Evelyne wrote to us. Would it be better to sell my condo and cash in on the money? Or rent it and take advantage of this new influx 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 allow ourselves to 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 today’s market, she could rent it for $3,000 a 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.
PAINTING
Market value of condo: $650,000
No mortgage
Income reported in 2022: $99,000
Employer pension: $6,000 per month
RRQ et PSV: $10,000
RETURN: $65,000
FERR: $365,000
Brigitte Felx, financial planner and senior regional director, corporate distribution strategy, global asset management at the Royal Bank of Canada (RBC), ran four scenarios.
“You have to take age into account,” she says. At 75, you’re 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. »
Let’s assume she gets her prize: $650,000. “Who says sales, 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 renting, because it collects income. With the 3.2% yield, she gets $20,800 in annual income that adds 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, Evelyn will use the full $650,000 over 20 years, principal 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. »
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 be $742,400 and in 10 years it would be $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%.
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 and maintenance costs and property taxes.
These are expenses that Evelyn can deduct from her rental income, which can climb up to 50% of the $3,000 rent.
With taxable income net of expenses of $18,000, added to the $99,000, she reaches $117,000 in income.
“We have just realized that from a tax perspective, there is no difference between selling and renting your condo,” insists Brigitte Felx.
For Évelyne, the real issues lie elsewhere. Brigitte Felx has compiled 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 was 60, this is something she would have had to consider.
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 her boxes to move to her boyfriend’s house, Évelyne absolutely must take care of 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.
