Do your research before selling a second home
Owning an investment property can provide useful income, while having a recreational property can provide a great place to spend time with family and friends.
But if you are thinking it’s time to sell, some careful research is in order.
“There’s a lot to consider when selling your investment property or a vacation home,” said Laura Parsons, the Calgary-area manager for mortgage specialists with BMO Financial Group. “Do your homework.”
A major factor when selling a property that is not your principal residence is the potential for capital gains. Generally, if you sell the property for more than your original purchase price, half of the capital gain is taxable at your marginal tax rate.
However, the Canada Revenue Agency has strict rules on calculating capital gains, and changes do occur, so Parsons recommends talking to your accountant and making sure they are knowledgeable about investment real estate.
“The impact of when you sell may have a bearing on how much tax you pay,” she said. “So, it’s really important that you speak to your accountant and make sure that this is a good time for you to sell.”
Your accountant can determine if there are ways to reduce your capital gains for tax purposes – any renovations you’ve made to the property of a capital nature, for example.
On the flip side, an accountant might caution you against a sale if you are expecting increased income that would bump you into a higher tax bracket.
“If you’re in a high-income-earning year, you may not want to have some capital gains on top of that,” said Parsons.
She says if you’re paying a mortgage on an investment property or vacation home, you should also consider the effects on financing if you sell.
“The impact of when you sell may have a bearing on how much tax you pay. So, it’s really important that you speak to your accountant and make sure that this is a good time for you to sell.” – Laura Parsons, BMO Financial Group
“Are you going to have penalties? Are you losing a great [interest] rate? Because sometimes you can port your mortgage if you plan on buying another investment property,” she said.
There are also ways to try and maximize the selling price for your property and determine when to sell.
Parsons recommends talking to your REALTOR® to see what the local market is like for the type of property you own, and to get an idea of vacancy rates if it’s a rental property.
Find out what’s going on in the neighbourhood, such as plans for improved transit or construction of a leisure facility that might appeal to buyers.
“Any time you go to sell, make sure you’re sharing a lot of the knowledge, because it will be more desirable from a buyer’s point of view,” said Parsons.
If the property needs fixing up, Parsons recommends highlighting the availability of the Purchase Plus Improvements program that allows a buyer to finance some renovations into a mortgage.
“Position it with your Realtor and your banker to do what’s called mortgage staging, where we actually show people coming in to buy the house that they can build the renovations right into the purchase,” she said.
Parsons’ final piece of advice is to talk to the experts – your financial adviser, accountant, lawyer and Realtor – before any sale.
“Everything matters, especially with investment properties,” she said. “You really want to make a great decision.”