Is there a Way around Paying Capital Gains Tax?

[UTCVenturesLtd]

I bought a home in the Crowsnest Pass for $75,000 in 2005 and used it as a weekender home. The value shot up to the $240,000 in the recent peak years. I put a $196,800 mortgage on the property to buy other properties. My stepdaughter currently rents this property from me and she has fallen in love with the property and wants to buy it. If sold, I would find a similar property in the area to replace it. Now the problem is paying the capital gains tax and then falling short of buying a similar property in the same price range. What can an investor do to make this kind of deal happen and not have to pay the capital gains????
My suggestion to my stepdaughter was to mortgage another property for me that was similar to what she was buying at a similar price and whenever CRA lets you sell and roll your money into another property without having to pay capital gains tax, we then can transfer titles and in the meantime we could do any upgrades to each other`s properties to put our own marks on them.
That seems like a pretty lame way of having to do things. Then the question arises that if the property is similar, why not leave well enough along and the stepdaughter just go and buy the similar property although not what she wanted, but perhaps doable and avoid creating a capital gains situation in the first place.
Anyone come across this dilemma? Is there a way of making a transaction like this happen without paying the capital gains on the property?

 

[PropertySolution]

I am interested in the answer to this as well.

 

[Thomas Beyer]

QUOTE (UTCVenturesLtd @ May 18 2010, 03:24 AM) .. What can an investor do to make this kind of deal happen and not have to pay the capital gains????..
a few options:
a) not sell
b) sell for a low price with a mortgage with a high interest payment .. now you pay taxes on the small gain only but on the income annually
c) lease the place, for X $s today and Y$s/month
d) do an agreement for sale, i.e. sell at a future date with some money today and some payments monthly and some more money at the future date

Options b) to d) really are just tax deferral strategies.

In the US you an do a tax free rollover called 1031 exchange, and there was talk in Canada about this .. but it does not (yet) exist in Canada.

 

[PropertySolution]

What about RTO, would that work? And as he is selling to his relative what would the pros and cons be?

 

[ChrisDavies]

The part where you used it as a second home should be a personal gain and thus tax free. The point where your daughter started paying rent is when the gain becomes taxable. If your mortgage was before she moved in, then it`s a clear measure of how much of the gain was personal. You`ll end up paying some tax, but the second home rule should help with part of the gain.

 

[bizaro86]

QUOTE (ChrisDavies @ May 18 2010, 12:39 PM) The part where you used it as a second home should be a personal gain and thus tax free.

This isn`t true. You can only have one personal residence at a time. If it`s a second residence, it`s absolutely taxable as a capital gain when you sell.

Michael

Source: http://www.cra-arc.gc.ca/E/pub/tp/ti-001/ti-001-e.pdf

The second page notes that you can only have one personal residence at a time.

 

[JohnS]

QUOTE (bizaro86 @ May 18 2010, 03:04 PM) This isn`t true. You can only have one personal residence at a time. If it`s a second residence, it`s absolutely taxable as a capital gain when you sell.

Michael

Source: http://www.cra-arc.gc.ca/E/pub/tp/ti-001/ti-001-e.pdf

The second page notes that you can only have one personal residence at a time.


I don`t have a source onhand to back this up, but I`m pretty sure the tax laws changed recently, and you`re now able to have 2 personal residences. That sheet was from 2005, so I believe it`s outdated. However, I don`t know if the new version would apply retroactively or not, so it`s something to look into.

Have a good one!

JohnS

 

[fumbrunner]

QUOTE (JohnS @ May 18 2010, 02:15 PM) I don`t have a source onhand to back this up, but I`m pretty sure the tax laws changed recently, and you`re now able to have 2 personal residences. That sheet was from 2005, so I believe it`s outdated. However, I don`t know if the new version would apply retroactively or not, so it`s something to look into.

Have a good one!

JohnS

This is incorrect - http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/nc...tng/mr-eng.html

Here is a link with a good explanation on the tax consequences of principal residences:
http://www.professionalreferrals.ca/2003/1...pal-residences/

 

[GaryMcGowan]

I would look at an Agreement For Sale as Thomas mentioned. Title and current mortgage stays in your name until she cashes you out sometime in the future. You then could offer your own financing to her and still make a spread on what your underlying payments are. "Granted she is family!" She would give you a down payment today.

 

[UTCVenturesLtd]

QUOTE (GaryMcGowan @ May 18 2010, 03:07 PM) I would look at an Agreement For Sale as Thomas mentioned. Title and current mortgage stays in your name until she cashes you out sometime in the future. You then could offer your own financing to her and still make a spread on what your underlying payments are. "Granted she is family!" She would give you a down payment today.


It seems the simplest way to do this deal is to make the selling price $235,000 which covers the capital gains and pays off the mortgage, lawyer`s fees and I walk away from it. They do their own down payment and financing arrangements. They wanted me to sell the place for cheap and be stuck with owing the capital gains and being short the full mortgage payout to the bank. That is family for you! There is too much stress in doing family deals, I won`t touch them again. <- That period means PERIOD! haha
Thanks Gary!

 

[Thomas Beyer]

QUOTE (ChrisDavies @ May 18 2010, 12:39 PM) The part where you used it as a second home should be a personal gain and thus tax free. ..
Since when is a gain on a 2nd home tax free ?

 

[ChrisDavies]

I misspoke. I was thinking of the second home program that lets you do high ratio CMHC financing on a second home still. Since when is a gain on a 2nd home tax free ?

 

[JohnS]

QUOTE (ChrisDavies @ May 19 2010, 09:57 AM) I misspoke. I was thinking of the second home program that lets you do high ratio CMHC financing on a second home still. http://www.firstfoundation.ca/second-home/

Oh, that might have been what I was thinking of then, too. Sorry if I added to the confusion, all!

JohnS

 

[navaz]

What is wrong with paying capital gains tax? You only have to pay tax on one half of the income? Isn`t that better then paying on the full 100% like employment income? or worst still, not making money?

These are the problems I like as a real estate investor and happy to pay the taxes

 

[UTCVenturesLtd]

QUOTE (navaz @ May 20 2010, 09:32 AM) What is wrong with paying capital gains tax? You only have to pay tax on one half of the income? Isn`t that better then paying on the full 100% like employment income? or worst still, not making money?

These are the problems I like as a real estate investor and happy to pay the taxes


If you have a second property that you buy for $100k and it doubles to $200k and you keep $50k of the profits, and pay approx. $25k capital gains on the balance, you then are left with $175,000 in a $200,000 market. That is the problem of real estate investing in Canada as I see it with a second property where paying capital gains makes you lose in the local market if you want to reenter it. (And there are the realtor`s commissions and legal fees to add to transactions) If the property market then slides to $150k, then you will do well, otherwise you might need to reinvest in a different area.

If you invest in a penny stock at .10 cents and it triples in a run up, you pay the capital gains and it being a cycling stock, you probably would be able to buy it back at .10 on the next low and do it all over again. A penny stock price could easily retract to where it started from whereas a property not. With stock trading, I smile at capital gains. The underlying trend goes up in spite of the fluctuations for real estate so you cannot get the same kind of bargains.

So would the best strategy be to buy and hold properties in a corporation forever so you never have to pay capital gains?

 

[Thomas Beyer]

QUOTE (UTCVenturesLtd @ May 21 2010, 03:10 AM) So would the best strategy be to buy and hold properties in a corporation forever so you never have to pay capital gains?
exactly .. while living off the cash-flow .. and occasional re-fi !