QUOTE (betrina @ Sep 3 2007, 10:26 PM)
It is my understanding that vendor-take-back mortgages give the seller of the property some tax advantatges becasue they don't have to declare all their capital gains in the year that they sell the property. Can anyone give me more details on the tax benefits of carrying a portion of the mortgage?
Also, I have a vendor who is looking to liquidate approximately 30 properties over the next year or so. Any tax tips I can pass along to him?
Thanks,
Trina Burgess
780-435-9286
Fairview, Alberta
I'm not sure if this tax advantage with specifically apply to a VTB. I believe there is a very good tax case to be made for the vendor (particularly vendor with large equity and large capital gain) to sell the property to you on an Agreement of Sale....commonly refered to as a 'Wrap". Basicaly (if you aren't familiar) you would complete a purchase agreement with the vendor where he retains title and you make a downpayment and then payments at an agreed interest rate for a period of time, at the end of which you re-finance the property and buy him our (I've sold this way).
This works particularly well for investors who are selling rental property they've owned for a LONG period of time, have 100% equity and have HUGE capital gain issues to deal with.
Example:
- $100,000 propety...originally purchased for $25,000
- If sold cash the vendor will realize a 75,000 gain...50% ($37,500) will be added to his income for the year the deal closes...about 50% ($18,750) if which will likely be paid in tax...thus net spendable cash of $56,250+$25,000=81,250.
- Your purchase property from him on an Agreement of Sale (WRAP) contract for $100,000 with $20,000 down (sample amount)
- Vendor finances the property with standard mortgage of 75% ($75,000)...all of which goes in his jeans today...plus your $20,000 downpayment.
You make payments on $80,000 to him, he makes payments on $75,000 to bank and keeps the interest on the $5,000 difference.
Vendor works with his accountant and declares the capital gain income over five years income tax....$15,000 per year, half of which is subject to tax...$7,500. $7,500 per year added to his annual income for the next five years, rather than $37,500 in one year will no-doubt make a HUGE difference in the tax bill for the average vendor...plus he has $80,000 cash (in this example) to spend almost exactly the same as before....and five years of interest income.
Use this concept as a starting point and start getting creative. I have the CCRA publications on my computer...would post them but can't figure out how...send me a message and I'll be glad to send them to you.
Glenn A. Heslop
GlennAlan Homes