Are you thinking of selling your investment property? Before you put your rental property for sale, there are 4 things to consider
Capital Gains
Yes, the government wants its cut. They are your silent joint venture partner and want a slice of the pie. 50% of the profits are taxable at your marginal rate. Here is how to calculate how much capital gains tax you will owe after selling your rental property.
Purchase price: $400,000
Sale price: $750,000
Acquisition & disposition costs: $50,000
Profit: $750,000-$400,000-$50,000 = $300,000
50% of the 300,000, $150,000 is added to your taxable income then you are taxed at your marginal tax rate. The highest tax rate is 53%, for the sake of simplicity, we’ll use 50%. In this case, your capital gains tax is 50% x $150,000 = $75,000.
A quick method to calculate your capital gains tax is 25% of the profit. In the above example, 25% of $300,000 is $75,000. Can you avoid capital gains tax? Probably not but you can minimize if you buy another investment property in the same calendar year and utilize capital cost allowance (depreciation). It is best to discuss with your accountant upfront before selling your investment property to understand the tax implications. Your accountant might recommend waiting till the following calendar year.
Tenants
It is less desirable to sell a tenanted investment property for a few reasons:
It is difficult to stage the investment property to show it at its best condition. Staging shows a property in minimalist fashion and it depersonalizes the property for the potential buyer to visualize living in the property
There are less potential buyers who want to assume tenants. Some buyers want to move into the property. A tenanted property might result in losing out on potential buyers who are looking for a home and not an investment property
If the tenants are under a lease agreement they have to be assumed, unless they are month to month then they will need 60 days notice via an N12
24 hours notice is required when booking property showings which need to be between 8am-8pm. There might be cases where the tenants will allow for less time due to work or family obligations
All the above present obstacles from presenting, marketing and showing the property.
Documents
There are 2 potential buyer groups for your investment property: end users who want to move in and real estate investors. Since you are selling a business, it’s good to have your documents in place. Lease agreements, latest rent increases, what market rents are in the area, income statement, etc. Your real estate agent should help you put the the package together.
Vacant Property
If you can come to an agreement with the tenants to leave before you put the rental property for sale that would be ideal. Just make sure you are selling the property, otherwise you can be fined up to $25,000 if you re-rent the property. Having the tenants vacate prior to putting up the rental property for sale, gives you the chance to do the necessary repairs to the property. The property will show well, it can be staged, marketed and it will attract a larger pool of potential buyers: end users and real estate investors.
Another tip, make sure you use the correct Landlord Tenant Board forms. Do not rely on text messages and emails when confirming end of vacancy with the tenants.
Thinking of selling your investment property? Download the seller’s guide.