Rental property sale good move
Sell rental property
Cliff and Elaine have decided to sell their rental property. They have good renters. But, since they are in their 80s, they don’t feel like cutting grass and clearing snow any more.
Capital gains tax
Twenty years ago, they paid $100,000 for their residential rental property. If they sell that house today, they’d expect to receive $300,000 net sales proceeds after legal fees and realtor’s commission. They’d report their capital gain of $200,000 on a 50-50 basis. Because only half of the capital gain is taxable, Cliff and Elaine must each add $50,000 to their taxable incomes.
The adjusted cost base remains at $100,000 because they only paid for regular maintenance, making no major improvements. They also did not make a capital gains election on their 1994 income tax returns.
Recaptured CCA
After claiming 4- percent Capital Cost Allowance (CCA) each year on the building portion of the original $100,000 purchase price, they have been able to deduct a cumulative total of $40,000 as CCA over the past 20 years. In the year of sale, this CCA would be recaptured, which means that each of them would have to add $20,000 recaptured CCA to their taxable incomes.
Normally, without counting rent, they’d each report about $20,000 pension income. If they sell their rental property in 2013, they would each add $70,000 to their incomes. Together they would owe about $52,000 of income tax (using Saskatchewan tax rates) on the house sale. That includes clawback of their Old Age Security (OAS).
OAS clawback
For 2013, OAS clawback starts when net income exceeds $70,954 and reduces OAS by 15 per cent of the income over that threshold. When an individual’s net income exceeds $114,640, all the OAS would be clawed back on the tax return for the year of sale.
Besides the OAS clawback for the year of sale, there would normally also be some OAS Recovery Tax for the 12 months starting July of the year following the sale. However, by filing a form T1213 (OAS) “Request To Reduce Old Age Security Recovery Tax at Source,” they may be able to continue to receive their full OAS benefits.
Simplify estate
By selling their rental property, Cliff and Elaine will no longer have 80 per cent of their net worth tied up in residential real estate, which does not always rise in price. They reduce their concentration risk.
Triggering a $58,000 tax bill now, while they are alive, simplifies their estate planning considerably. After they both die, their eldest daughter, who is their executrix, will not be forced to sell the rental property in a hurry to raise the cash needed to settle the estate.
The tax bill should be lower by selling while both coowners are alive and able to split income 50-50. There’d be a higher tax bill if all the income had to be reported by the survivor who sells after one of them dies.
Reinvest proceeds
Out the $300,000 net sales proceeds, Cliff and Elaine should set aside about $52,000 to cover their income tax bills. That leaves $248,000 to invest.
Today’s extremely low interest rates certainly do not look attractive compared to the $2,000-per-month rental income they’ve been accustomed to receiving. Given their age, they will likely choose to invest in GICs rather than preferred shares or corporate bonds.
Of course, they now gain the freedom to spend their principal on long term care costs, if the need should arise. Many of their friends have been moving into senior’s residences and personal care homes.
Because neither of them has ever had a tax-free savings account before, they can each deposit $25,500 to shelter some interest income from tax.