Need advice on possibly botched JV

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Need advice on possibly botched JV

Edward Rueca
Toronto, ON · Member since 2018 · 17 posts · 1 vote

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. 

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Oren K.
Rental Property Investor · Toronto, Ontario · Member since 2012 · 538 posts · 298 votes
8y

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

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  • Edward Rueca
    OP
    Toronto, ON · Member since 2018 · 17 posts · 1 vote
    8y

    @Oren K. Thanks for the insight! I'll definitely be speaking to an accountant/lawyer. Just trying to get a vibe on what some other investors might do in my situation. 

    Just FYI, the property is in both our names. 

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  • Jacob Perez
    Rental Property Investor · Hamilton, Ontario · Member since 2016 · 285 posts · 181 votes
    8y

    @Edward Rueca I realize the issue the lender had here re: the 100% liability w/ 35% of the rent. Long story short, you're using the wrong lender lol.

    1Reply
  • Chris Habets
    Investor · Ottawa, Ontario · Member since 2017 · 145 posts · 52 votes
    8y
    @Edward Rueca Good investment for you! The issue you're having with the 35/100 split is very common with traditional lenders - others will work more reasonably with you. Talk to a broker about B lenders or alternative lenders. That being said, I would sell it now anyway so that you can use traditional lenders. Talk to an accountant, I would expect the sale of the building will be subject to less capital gains tax then people here are saying. It can be based on square footage - and the parts that you and your partner are in, plus the common area, will be not subject to cap gains. I just went through this recently, after the changes to the tax code.
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  • Michael Roman
    Rental Property Investor · Province of Quebec · Member since 2018 · 35 posts · 9 votes
    8y
    @Edward Rueca Canadians are allowed a lifetime capital gains exemption. There are also stipulations for properties that were in fact primary residences. I do not want to give accounting advise as I am not an accountant but I would recommend spending $500 on a seasoned and reputable chartered accountant that specializes in this and it may just save you tens of thousands of dollars. He may also recommend a restricting of your assets through corporations.
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  • Roy N.Pro Member
    Rental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votes
    8y

    @Michael Roman

    The lifetime capital gains exemption is applicable to the sale of a) qualified small business {CCPC} shares; b) qualified farm property or c) qualified fishing property/business.

    A qualified small business must generate its revenues in the form of active income, which explicitly disqualifies holding/investment companies whose income is predominately passive.   

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  • Michael Roman
    Rental Property Investor · Province of Quebec · Member since 2018 · 35 posts · 9 votes
    8y
    Originally posted by @Roy N.:

    @Michael Roman

    The lifetime capital gains exemption is applicable to the sale of a) qualified small business {CCPC} shares; b) qualified farm property or c) qualified fishing property/business.

    A qualified small business must generate its revenues in the form of active income, which explicitly disqualifies holding/investment companies whose income is predominately passive.   

     I stand corrected.  Thank you Roy.  My recommendation however to hire a specialized and provincial accountant would still stand in order to get the best possible recommendations.

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