# Selling Rental Property to Family Members



## frugalmini (Feb 19, 2011)

Hi All

I have a rental condo that I am thinking of selling it. And my parents are interested in buying it. Here is the background. 

My parents rencently immigrate to Canada, and currently living at my home. But they are looking to buy their own condo, but we don't know when. They are interested in my rental property because of the price and steady cash flow overall, and the location is good, so it attracts decent tenants. But they don't want to live in there, because it's on a 3rd floor. And they just want to live in ground floor condo. I don't plan to make a big profit out of my parents, so I will give them a small discount. 

I understand that we will each find a lawyer to do the transaction. And they will get their accountant to file rental income each year. 

Question: 
1. But how much of the discount will be considered reasonable to not trigger audit from CRA? Last year, similar condos but better interior in the complex was sold between 160k and 170k. I thought of asking for 160k. I bought the place for 155k.
2. What are the tax consiquences for both parties when I sell a rental property to my parents? 
3. Can they living at my home with me for now, but owning a rental property? I don't want to rush them into buying a home, plus it's nice to have warm meals when I come home from work. 

Thank you in advance for all your help!


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## Just a Guy (Mar 27, 2012)

First off, you don't really need separate lawyers, especially for a simple transaction like this. Getting the same lawyer would lower costs a bit. 

Next, you could sell the place to your parents for a reasonable amount and CRA won't have issues. 

You will probably be hit with financial penalties (mortgage penalty, legal fees, mortgage discharge fees, etc.) which can quickly eat up any "profits" you make. 

As for tax issues, you'd be hit with any capital gains you achieved after you deducted your expenses (legal, mortgage penalties, etc.). 

Depending on the province there may be other fees like land transfer. 

Finally, yes they can own a rental without having a primary residence. No issues there.


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## frugalmini (Feb 19, 2011)

THank you so much!


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## Mukhang pera (Feb 26, 2016)

I'd probably just convey it to them at a declared value of $155k. It sounds from what you have said that $155k is very close to fair market value and arguably it IS fair market value. Then you have no capital gain (not that at 160k a gain of much consequence is likely after expenses). 

You do not say if the condo is mortgaged, but your parents may be able to assume the mortgage if they require financing, so costs related to the mortgage on a transfer are an unknown without knowing more detail. 

I would guess that all provinces charge land transfer fees. Just a matter of where they fall on the scale of gouging.

While it pains me to have to agree with JAG, this psuedo-lawyer concurs that separate legal representation is not required in a case like this. You are not divorcing your parents. There should be no need for them to receive independent legal advice if they are adults of sound mind and able to understand the nature of the transaction they are entering. If they are recent immigrants who lack facility in English, I would suggest choosing a lawyer who can explain documents, etc. in their language.


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## Mortgage u/w (Feb 6, 2014)

I'm more curious to know why you want to sell to your parents your rental. I mean, its usually the opposite you see - parents handing over assets to their kids.....

Is it the money you need? Sorry, but I just don't understand your reason behind this transaction. If they were to live in it, I would completely agree. But to simply transfer a rental to your parents who will continue living with you - makes no sense to me.


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## OptsyEagle (Nov 29, 2009)

Be careful with the discount. This is a non arms length transaction and CRA will not like the discount at all. Any discount will reduce the capital gains taxes that you will owe. It won't be the first time a tax payer tried to use that strategy to reduce their taxes. I am not saying you are doing this, but look it up, because CRA will say you are. I am pretty sure it is in the guide. 

If I recall the penalty for what you are suggesting is to double tax you. They can add more if they feel you were doing it on purpose but in your case the double taxation will probably be the final cost to you. How it works is this. Lets say you bought the property for $100,000 and it is worth $250,000 now. You sell it to a non arms length individual for $200,000. CRA will then reassess you to change your capital gain from $100,000 to $150,000. They unfortuneately will not change your parents cost base from $200,000 to the $250,000 figure they assessed on you. Therefore when your parents sell the property the tax on that $50,000 of capital gain will be paid twice. Once by you and once by your parents.

So be careful. What you are about to do they have seen before and do not look fondly upon it.


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## frugalmini (Feb 19, 2011)

Mortgage u/w said:


> I'm more curious to know why you want to sell to your parents your rental. I mean, its usually the opposite you see - parents handing over assets to their kids.....
> 
> Is it the money you need? Sorry, but I just don't understand your reason behind this transaction. If they were to live in it, I would completely agree. But to simply transfer a rental to your parents who will continue living with you - makes no sense to me.


Ya, I kind of need the money in a year or two.


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## frugalmini (Feb 19, 2011)

Mukhang pera said:


> While it pains me to have to agree with JAG, this psuedo-lawyer concurs that separate legal representation is not required in a case like this. You are not divorcing your parents. There should be no need for them to receive independent legal advice if they are adults of sound mind and able to understand the nature of the transaction they are entering. If they are recent immigrants who lack facility in English, I would suggest choosing a lawyer who can explain documents, etc. in their language.


Thank you Mukhang pera! That's a good point there, I will get a lawyer who speaks their language.


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## frugalmini (Feb 19, 2011)

Good point, I never thought there could be double penalty. thank you OptsyEagle!


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## Just a Guy (Mar 27, 2012)

to all provinces have a land transfer tax. I noticed, a bit late, that you're in Alberta, which has a few benefits to your situation...

1) Alberta doesn't have a land transfer tax.
2) Alberta is in a recession, real estate prices have taken a hit. I doubt CRA would come after you over 5-10k of potential capital gains at best. It's a completely different scenario than Optsy presented.

On another note, there aren't many assumable mortgages anymore...in fact I think the last one I ever saw was about 10 years ago...can your parents qualify for a mortgage? I'm not a recent immigrant myself, but I thought banks like people to be citizens, or landed immigrants, or at least have several years of residency. 

Finally, have you actually run the numbers on your rental? At the price you bought, it doesn't look to me like it's a very good investment...the cash flow would be tight, especially if interest rates increase.


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## OptsyEagle (Nov 29, 2009)

The issue came to the forefront when they eliminated the ability for a married couple to designate two properties as their principle residence. I think they did that in the 80s. There was a big push to deal with the family cottage. Before the change one spouse would designate the house and the other would designate the cottage. Now the cottage capital gains were now taxable. So financial gurus started advising people to sell the cottage at the ACB to the children and defer the taxes. So if a parent bought a cottage 30 years ago in the Muskoka's for $50,000 and it is now worth $1,000,000, they would owe hundreds of thousands of dollars on it when they passed it on to their children in their will. The children would be forced to sell it just to pay the taxes. So those finance gurus suggested selling that cottage for $50,000 to the children and presto nothing was taxable right away and the kids got the cottage and the Canadian taxpayer got stiffed. So the government came up with those penalties for non arm's length (inside family) transactions. that are structured this way. It pretty much put an end to that great idea. 

Unfortuneately yours is identical even if your intentions are more noble.


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## Just a Guy (Mar 27, 2012)

Except that there is a good case that the value of the property hasn't made any capital gains...of course an appraisal probably wouldn't hurt to confirm it, or maybe even the property tax assessment. 

The big difference is, the property hasn't made any real gains. He didn't buy the property 30 years ago, only a few years ago, and the property values in Alberta have taken a hit, very publicly and well known. The OP isn't really trying to dodge capital gains like you suggest, he hasn't made any. Not every place is toronto or Vancouver...


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## redsgomarching (Mar 6, 2016)

OptsyEagle said:


> Be careful with the discount. This is a non arms length transaction and CRA will not like the discount at all. Any discount will reduce the capital gains taxes that you will owe. It won't be the first time a tax payer tried to use that strategy to reduce their taxes. I am not saying you are doing this, but look it up, because CRA will say you are. I am pretty sure it is in the guide.
> 
> If I recall the penalty for what you are suggesting is to double tax you. They can add more if they feel you were doing it on purpose but in your case the double taxation will probably be the final cost to you. How it works is this. Lets say you bought the property for $100,000 and it is worth $250,000 now. You sell it to a non arms length individual for $200,000. CRA will then reassess you to change your capital gain from $100,000 to $150,000. They unfortuneately will not change your parents cost base from $200,000 to the $250,000 figure they assessed on you. Therefore when your parents sell the property the tax on that $50,000 of capital gain will be paid twice. Once by you and once by your parents.
> 
> So be careful. What you are about to do they have seen before and do not look fondly upon it.


Read this carefully, this is a great post. CRA can at any time challenge what you claim to be FMV and if you discount the property heavily, you are sheltering gains. CRA will say nope and adjust your FMV to what they believe, record that as the PoD, you now owe taxes on funds you haven't received and as Optsyeagle said the addition is not added to your parent's adjusted cost base of the property which means when they sell, they will be taxed on that same amount as well as future gains.

Get the city assessment or an appraisal and sell it to them.


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## Mukhang pera (Feb 26, 2016)

OptsyEagle said:


> So those finance gurus suggested selling that cottage for $50,000 to the children and presto nothing was taxable right away and the kids got the cottage and the Canadian taxpayer got stiffed. So the government came up with those penalties for non arm's length (inside family) transactions. that are structured this way. It pretty much put an end to that great idea.


Actually the cottage-owning family got stiffed. 

Many years ago, one of the first people who started writing financial advice/investing books was a guy by the name of Morton Shulman. Not many here will have heard of him. But, in one of his books, he posed the following multiple choice question:

Capital gains tax is:

(a) tax on inflation
(b) tax on inflation
(c) tax on inflation

Let's take for eg. that cottage on Lake Joseph, purchased in 1960 for $50,000, sold today for $1 million. The taxman says you made a capital gain of $950,000. Really, you made nothing. What will that $1 million get you today? A Muskoka cottage, just what you had. But, after paying your capital gains tax, you no longer have the purchasing power to buy what you once had; no more, no less. I have always felt about capital gains tax the way Morton Shulman did. But government has done a splendid job of convincing the populace to see it their way. No right-thinking taxpayer should want to see the family cottage stay in the family. Not when government can put the money to better use.


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## Mukhang pera (Feb 26, 2016)

redsgomarching said:


> Read this carefully, this is a great post. CRA can at any time challenge what you claim to be FMV and if you discount the property heavily, you are sheltering gains.


It's an accurate post, but hardly apropos to the OP's post.



frugalmini said:


> Last year, similar condos but better interior in the complex was sold between 160k and 170k. I thought of asking for 160k. I bought the place for 155k.


Where's the heavy discount in that? Better condos sold for $170k tops. The OP is thinking of selling for $160k. As JAG points out (have to agree again, ugh) there's no evidence of any real gain here, quite possibly a loss.

If the price is well below that the local taxing authority says it's worth (if they do actual value assessments there), then that is asking for trouble, at least without an appraisal casting serious doubt on the assessment. Otherwise, spending money on an appraisal here seems like a waste.

Or maybe the OP should hire a realtor to sell it to his parents, pay a $10,000 commission, and report a loss.


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## OptsyEagle (Nov 29, 2009)

Mukhang pera said:


> It's an accurate post, but hardly apropos to the OP's post.


What's inappropriate about it? 

The government is not going to differentiate between a tax strategy to dodge capital gains taxes and the OP intention to give a discount to his parents. Everyone said they were just giving a discount. CRA will ignore all that and look at the tax law. All I was doing was forewarning him of this. Whether the tax is right or fair is not really relevant.


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## Mortgage u/w (Feb 6, 2014)

frugalmini said:


> Ya, I kind of need the money in a year or two.


You are better off refinancing the place instead of selling. Not like you will get much more out of it by selling. You will avoid all the legal fees and taxes you will incur. You can refinance up to 80% of current market value. Even if your parents buy, they cannot finance a single-unit rental over 80% - CMHC has dropped this product.

As for selling to your parents, they will need to qualify for a mortgage. If they are landed immigrants, banks will not lend to them. If they simply have a permit and considered non-permanent residents, they still will not qualify for a rental. They will have to be permanent residents with qualifying incomes in order to be eligible. And again, max 80% LTV only which is what you can get through a refinance.


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## Mukhang pera (Feb 26, 2016)

OptsyEagle said:


> What's inappropriate about it?
> 
> The government is not going to differentiate between a tax strategy to dodge capital gains taxes and the OP intention to give a discount to his parents. Everyone said they were just giving a discount. CRA will ignore all that and look at the tax law. All I was doing was forewarning him of this. Whether the tax is right or fair is not really relevant.


Well, you might know the CRA better than I, but I would not expect them to subject the contemplated transaction to microscopic scrutiny, to assign an auditor and commission appraisals, etc. in respect of a small transaction where a non arm's length vendor could be seen to be offering a discount of a few percent to the purchasers in a softening real estate market. It just seems to be that dire warnings about punitive tax consequences raining down on anyone near the transaction for years to come seems unwarranted. I would hope that the CRA expends its resources and directs its energies more wisely. The taxpayers fund whatever it gets up to.


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## Just a Guy (Mar 27, 2012)

Mr. T did just allocate a whole pile of money to CRA to hunt down more cash owing....maybe optsy has some inside information after all a 10k difference in price would result in a $5k capital gain, may be worth having 2-3 CRA people spend two weeks on an audit to collect that maximum $2500 in income (before expenses which would easily knock out any gains whatsoever most likely). 

Much better than going after those people ducking $50k capital gains, so one could see how the comparison is not inappropriate...


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## OptsyEagle (Nov 29, 2009)

I am just answering the OP's question. I cannot say if they will give him a break or not. I wouldn't. How could I know that it is not a tax dodge? Because he says it isn't. Will they catch it? Who knows. I

t was an appropriate reply. The tax penalties are real. I am just not sure why you think I should have held the answer back or reworded it in some way. Tax law is what it is. Most never get caught. All worry about getting caught. Most regret it when they get caught.

By the way. What do you think this guy is trying to do:

http://canadianmoneyforum.com/showthread.php/112258-Capital-gain-and-best-way-to-avoid-it

I will quote:



> I obviously (in my best interest) want to pay as little as possible to the tax man, I'd like to know what I can do to minimize the capital gain or to legally avoid it as much as possible.


How long do you think it will take for that poster to think about selling his property to his son at a reduced price? Do you think CRA would see any difference between the poster of this thread and the poster on the thread I just linked above? I seriously doubt it. Especially since I doubt CRA reads message boards.


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## Mortgage u/w (Feb 6, 2014)

I would have to agree with OptsyEagle. As the OP admitted up higher, he's trying to cash in so the intent is not what it seems to be. Just like we see it, CRA will see it too. Doesn't mean he will get audited - but the possibility is there. And who's to say he will not audited on something else, and the capital gain gets indirectly discovered?? Seems too much of a gamble for me. Besides, there is no need for the sale in the first place - as I commented earlier. He's safer with a refinance.


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## Mukhang pera (Feb 26, 2016)

I guess I missed it in the OP's posts, what everyone else here picked up, namely, the fact that the condo is mortgaged and that the parents don't have cash, and require a mortgage in order to purchase. I must be more attentive in my reading.


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## frugalmini (Feb 19, 2011)

Big thanks to everyone trying to help me understanding the situation. 

First, I am not he, I'm she. The reason for needing the cash is not that urgent, but because I am planing to have another baby in a couple of years, and having 2 mortgages on my name is kind of risky during the mat leave with reduced income. I do not want to get hit with a special assessment or lost job, or any of the unforeseeables. I'm that kind of person that likes to worries a lot. Definitly don't want to deal with CRA. LOL

As for the market and recession in Alberta, many people I know lost their jobs. The housing market is not at the best for sure. In fact, a couple of my coworkers just bought houses at pretty good price compare with a couple of years ago. 

Anyways, It's not that I have to sell it to my parents. When I mentioned that I want to sell it, they expressed their interests. I think it's a great condo and would like to keep it in the family if I can. But if the buyers being my family could potentially cause so much trouble, then I will either refinance it like Mortgage u/w suggested, or list it with my realtor. 

Thanks to everyone again!


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