Can an investment property fund your retirement?


Dear David: We own an investment property townhouse that we’ve been renting out for 15 years. We’re thinking of selling, as the current value is high enough to advance our retirement by a few years. Our tenants have expressed an interest in buying, should we sell to them? – READY TO RETIRE

DEAR READY: As someone who watches the market, you’re likely aware that property values in our area have pretty much doubled since 2016. Secondary property owners like you are in a great position to enjoy the windfall, since you can sell your investment property without having to leave your home.

Before you rush to sell, I urge you to speak to your accountant. The sale of a rental property has different tax implications than the sale of a primary residence, and these may affect your overall retirement strategy.

In Canada, secondary properties are subject to capital gains tax based on how much they have appreciated since the time of purchase. Capital gains are taxed at a lower rate than regular income. They may be affected by the timing of your sale in relation to your retirement. Depending on your situation, closing the sale of your investment property in January of next year could make better tax sense than selling it now. If your tax position changes when your income is lower, the amount of capital gains you’ll pay might also change.

With retirement funds at stake, you’ll need to sell your property for the best possible price. But what should that price be? Pinpointing a value can be tricky, even for those of us who work in the market every day. Although conditions have cooled a bit from the frenzied days of January and February, things remain unpredictable. There’s no way to tell exactly what your property might bring without fully exposing it to the open market on the MLS system.

If you sell directly to your tenants, you’ll forego the benefits of MLS exposure and could potentially leave a lot of money on the table. If your tenants are sincerely interested in purchasing your home, they can work with an agent to submit an offer and compete with other buyers if necessary.

Selling a tenanted property can be challenging. Most tenants are aware they can be displaced by a buyer who wants to move in, and often they’re not happy about it. There are a multitude of things that can be done to respect everyone’s needs and ensure showings run as smoothly as possible. The Residential Tenancies Act lays out rules that govern showings, tenant renumeration, and the timelines required to show a rental unit. An experienced Realtor can help you navigate these complex waters.

PRO TIP: Last year I did a CMA (Current Market Assessment) on a property that the owner later decided to sell to their tenant. The owner felt bad that the tenant was short on funds at the time and put off the sale until spring of this year. Unfortunately, they didn’t factor in market appreciation and left $100,000 on the table. Real estate happens in real time. Had the owner stayed in touch, they would have realized how dramatically the market had changed. #AskDavid #Advice

David is a top Broker in Kitchener-Waterloo Region who helps you personally when selling or buying your home. Moving? Get it right. Speak to David today! Call or text 519-577-1212.