Hi all, I am also new to the forum. Looking for some advice as to how to proceed.
In 2012 I partnered up and bought a triplex to rent . We went 65% for him and 35% for me on the ownership and rent split as I was still young and didn't know any better. We were still living with our folks at the time so our 5 year plan was to live in 2 units and rent out 1 unit until we saved enough to move out and rent all 3 units.
Long story short, my wife and I tried to buy a new home but unexpectedly were denied a mortgage approval because although the property was split 65% to 35%, I am still liable for 100% of the loan but only 35% of the rent. What would be the best way to proceed? Sell the property, or keep? What would you do?
also FYI, We bought the triplex for 780k with 40k down. Recently has been appraised for 1.4m.
Any insight, would be much appreciated.
Definitely sell, as you likely qualify for all your profit tax free under section 121. This was a very good deal for you.
@Wayne Brooks this sounds like Vancouver or Toronto appreciation.. I am not sure the Canadians have the same tax treatment they might though..
sounds like a great deal for this guy though..
Originally posted by @Hai Loc :
Capital gains will eat the appreciation alive.. Prices in Toronto certainly doubled since 2012..
In the US if this person owner occupied it 2 of the last 5 years he could shelter 500k his 35% of 1/3 of the gain
since its a tri plex and he only lived in one unit.. Cap gain rate when I invested in CA for me a US citizen was 25% is that still the same rate for a Canadian.. and also do you have the 1031 free exchange method we have in the US .. well not free but you can roll up tax DEFERRED to another property but only the portion that was not owner occupied and it has to be an investment property not a home. Since there is no tax up to 500k on owner occ anyway.. if that all makes sense.
Yes I do live in toronto. Not 100% sure how capital gains work but @Hai Loc we were looking to buy in the 800k range. By refi the rental and pay cash, do you mean use the equity?
If I have this right, you invested ~275K (35% of 780K). IF you net out $1.4M on the sale, there is ~ 600K of capital gain which will be taxed 150K (25%) of which you will be responsible for ~50K for a profit of $157K; approaching 60% after tax profit over 6 years.
So, you invested ~$275K and will get out $432K ($275K + $157K); over 50% of your target purchase of $800K. Don't know of a bank that would turn you down on less then 50% LTV on a primary residence. Alternatively, do a 75% LTV (Still a slam dunk) and use the remaining $100K to remodel to your tastes, accelerate retirement savings, do a bit traveling, etc (or any combination).
As always, check with an accountant especially as sounds like your first time dealing with these issues. These are life issues and not stuff you want to make a mistake with.
@Jay Hinrichs - Canada does NOT have an equivalent of a US 1031 exchange (wish we did!). It simply does not exist and you owe taxes in the year that your sell. Hence why Canadians should not do 1031's in the US; Canadian taxes would still have to be paid 'now' and that creates other problems down the road.
@Oren K. actually i invested about 30k on the investment after closing cost. Asking price was 780k and our loan was for 740k.
@Hai Loc Thanks for the prompt responses very informative. If you were in my situation, would you sell? It seems like if we sell, we can afford a principle residence with a basement renter, as well as investing in a separate rental property perhaps somewhere more affordable , think Windsor, London etc. Once I educate myself a bit more, I would like to pursue rental investment properties using Buy and Hold strategy.
I wouldn't call your JV botched necessarily. The fact that you made the move in the first place, got your foot in the door and now you have equity! I would talk to an accountant about the capital gains you may have to pay if you sell. That will help to understand what your next move could be and how much money you'll have to work with. Does your partner want to sell the building or will he buy you out? Are you still living in one of the units? If it were me, I would sell so that I could buy the house with my wife. If you put 20% down, so 160K, you'll probably still have 65K left from the sale of the triplex, by my quick calculations. Then you could use the remaining profit to reinvest in a cooler market where you don't need as much capital. I like the basement suite idea, it works for me and has cut my amortization in half. I have a suite in my primary residence as well as one in a rental house I own.
@Michael Fedun Thanks for the response. My partner also wanted to move at the 5 year mark but was turned down for a mortgage. Yes we are both still living in 2 separate units of the property. I am drifting more towards selling as well but also trying to determine what the pros are for keeping it. Is there a penalty for selling prior to the end of a mortgage term?
@Edward Rueca Yes, there would most likely be a penalty for ending the term early. Lender's can have different policies but it is typical to pay a penalty fee for the remainder of the term. You would find that information in your mortgage documents. Unless you are going to purchase another property at the same time, then depending on the mortgage agreement, you can transfer or also known as porting the mortgage. Porting the mortgage is great because you will continue the term at the same rate, which is probably lower than what the rates are today. Not all lenders allow porting so you'll have to ask or read the mortgage documents. There may also be bridge financing available to you, which allows you to use the current equity in your property as a down payment for the new home. Once the current property sells, the bridge loan is cleared with the proceeds of the sale.
Cash out your rental and now you are strong enough to go solo. Now you can be behind the driver seat steer the way you wish to pursue.
Sell and each do your own thing with the capital. Bravo on that appreciation! I don't think there is 1031 tax deferred exchange in canada but talk to a local tax attorney see what ideas he has.
Appreciate the responses guys!
@Steve B. In Canada, simply put, you do not have to pay capital gains on the sale of your primary residence. There are stipulations like the time you have lived in the property, etc. Flippers have tried to skirt paying capital gains buy living in the property for a year however, from what I understand, the government is cracking down on that. If the property is not your primary residence then you will have to pay capital gains tax on 50% of the profit, at your personal income tax rate. Example to keep numbers simple: buy at 400k, sell at 600K = 200K gain minus selling cost and maybe rehab cost of 100K = $100k profit, 50K is taxed at say 25% (depending on your personal income tax rate) so you pay 12.5k in taxes and keep 87.5K
Originally posted by @Steve B. :
@Oren K. Jay was talking about section 121 which is 250k single / 500k married capital gain exemption if you owned your personal residence 2+ out of 5 years
A 1031 is a like in kind tax free exchange of rental property. Two very different things
Not sure if Canada has either equivalency
Things are a little different in Canada, here you do not pay capital gains on the sale of your primary residence. In the OPs case, he is using one unit (say 1/3) of the property as his primary residence. If they were to sell the building, he would not pay capital gains on that portion of the sale. Similarly, his partner would not pay capital gains on the portion of the building constituting his primary residence.
@Edward Rueca From what I understand, you would pay capital gains on 2/3 of the property since you only live in 1/3. So you would pay capital gains tax on 50% of 2/3 of the profit of 35% of the building. It's getting messy, but I think that's how it would work. Again, better info would come from an accountant. I don't think family is considered.
One further note of caution being the JV arrangement. Whose name is the property in; yours, jointly with his, in a company that both of you pay 'rent' to? Each one may have implications regarding taxes. For example, if it is only in your name, I don't think he can claim it a primary residence.
I will emphasis again that getting advice from the non-professionals on BP is good for education but absolutely NOT a basis to make final decisions. You are dealing with hundreds of thousands of $, so spending a few $ on proper advice on issues that you do not have experience with is well spent.