# Stuck with capital gains?



## Fleet (Nov 20, 2011)

I am seeing if there is a way to make good out of what was likely the wrong decision made with good intentions. In 2007, my then girlfriend (now wife) and I were both just fresh out of messy divorces and starting over. Long story short, my parents ended up "buying" a house for us in so much as they took out the mortgage in their name. We pay then "rent" which is in essence the mortgage, property tax, insurance (etc.) amounts. I.E., they don't make any money, and we don't pay any less than if we had bought the house ourselves.

I never thought much of it at the time, but now I am starting to understand that if we are ever going to take over this house, it is going to mean that my parents will pay capital gains? This has come to the forefront as both families (my parents / me and my wife) are looking into selling our properties in a few years and build a new house with a "granny suite" so we can watch over them as they get older.

So is our only option to transfer the mortgage ASAP and simply eat the capital gains and cut our losses (as the property continues to appreciate year after year)? Given that there is a few years before we look to build the new home, is there some way I can be added to the mortgage and have it become my primary residence which was the intention? I know the smarter way would have been for my folks have used resources to enable me to get the mortgage, but that is in the past now.


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## Westerly (Dec 26, 2010)

Look to the reasons for your parents involvement and, perhaps more importantly, the actions over the years: did they do this specifically for you, who has paid the repairs / maintenance, any agreements up front, have your parents reported the "rent" and expenses for income tax purposes or were they simply a pass-through for you to buy the home? Who gets the net proceeds from the sale? 

Those are just a number of questions which may indicate ownership for tax purposes. If what they were really doing was enabling you to buy the house then you may have beneficial interest over the property which, depending on the circumstance, CRA accepts as yours. I'd pass it by your accountant with your specific facts, you might be able to claim the principle residence exemption when it sells.

If the intent and facts of the purchase was an investment for your parents then it's taxable and they may want to consider other options. 

If in fact they owned the home you may be able to participate through your RRSPs in the Home Buyers Program if you and your spouse haven't lived in a home that you own, (or have ever owned) in the 5 years leading up to your next purchase. Research the CRA website for specifics/rules on how that works.


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## OhGreatGuru (May 24, 2009)

Fleet said:


> I am seeing if there is a way to make good out of what was likely the wrong decision made with good intentions. In 2007, my then girlfriend (now wife) and I were both just fresh out of messy divorces and starting over. Long story short, my parents ended up "buying" a house for us in so much as they took out the mortgage in their name. We pay then "rent" which is in essence the mortgage, property tax, insurance (etc.) amounts. I.E., they don't make any money, and we don't pay any less than if we had bought the house ourselves.
> 
> .... Given that there is a few years before we look to build the new home, is there some way I can be added to the mortgage and have it become my primary residence which was the intention? ...


Your post doesn't make sense. Forget the mortgage. Whose name is on the title? Your parents holding the mortgage doesn't give them ownership. 

Mind you, if the mortgage is in their name, it usually means they are the owners, so they didn't "buy" you a house at all. They bought a house that they are renting to you at cost.

If your parents are the owners, you can consider looking into a rent-to-own contract. But the capital gains liability is still with your parents.


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## Fleet (Nov 20, 2011)

West, I appreciate your reading between the lines. That is exactly what I was looking for... indeed I will be seeing my accountant but collecting this info in advance will surely save me the 2nd trip I would have had to make without it.


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## marina628 (Dec 14, 2010)

couldn't the parents just sell the house to you for what they paid for it or better still what is owing on the mortgage which will save you some land transfer taxes ?


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## MoneyGal (Apr 24, 2009)

Westerly's advice is good. You should work with a lawyer experienced in real estate and/or estate transactions as well as an accountant to determine which scenario results in the least overall tax / greatest benefit. 

As Westerly said, if you would like to use the first-time home buyer's program, it might be advantageous for your parents to retain ownership of the house. Once you have both of your tax situations, an appraisal, and some other information about how the house was treated by both sets of parties, you will be in a better spot to make decisions. 

Here is a link to the tax interpretation bulletin CRA has issued on ownership of a principal residence, which discusses legal and beneficial ownership:

http://www.taxwiki.ca/IT-437+Ownership+of+Property+(Principal+Residence)

NOTE: if you are in Quebec, there are special rules and the concept of beneficial ownership is not valid.


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## kcowan (Jul 1, 2010)

This situation comes up regularly. The parents buy the house and rent it to their offspring. They must treat it as an investment property claiming rent as income and deducting CCA and maintenance et al. They cannot avoid a capital gain (unless one of them is on title and the other has their name on title of their principal residence). It require professional help to make sure that they benefit from all the rules.


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## MoneyGal (Apr 24, 2009)

But they can avoid a capital gain if (and only if) the true beneficial owners of the house are found to be the child + spouse. 

This issue arises all the time in estate planning and it is by no means a sure thing that the parents are both the legal and beneficial owners (but I have no real idea of the facts in this case).


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## andrewf (Mar 1, 2010)

What a mess. The time to think about these matters is before you spend several hundred thousand dollars.


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## MoneyGal (Apr 24, 2009)

To Andrew's point: http://www.boughton.ca/files/JB_article.pdf

Also, I should note that the determination of beneficial ownership is a determination of fact. 

Finally, I can't seem to find any advance rulings from CRA on the topic of beneficial ownership and the principal residence, but here is a letter from CRA on same: 

http://www.taxmentor.ca/av/2008-0282461E5.pdf


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## Cal (Jun 17, 2009)

It could make a difference for you, if you are a believer that the RE market will sputter out....then perhaps if that happens you wait a bit and could get a lower valuation, and reduce some of the capital gains when transfering it into your names.


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## marina628 (Dec 14, 2010)

Another strike against buying RE for your kids to live in  I am learning so much here


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## marina628 (Dec 14, 2010)

I have to ask this question , did you involve your parents because you had just gotten out of a messy divorce and was afraid you would get burned on buying the house with G/F ?


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## Fleet (Nov 20, 2011)

Thanks for the links MoneyGal and everyone for the input. This situation is certainly not typical. The reason things went down the way they did was because of the instability of my situation. At the time, my business was tanking and I was in the process of buying out my partners. Was also "buying out" my soon to become my ex-wife (or we may have divorced by then - if so, it was very recent). GF's ex (turns out) is a sociopath and basically just liked to do things to mess with her because she finally left him. I was looking for a simple $100k house at the time to regroup on life.

My parents came along to look at the open houses me and my GF went to and we looked at a few out of our range while we were out. This house was deliberately under listed (a strategy intended to incite a bidding war), but my Mom fell in love with it and wanted it in the family. After the war, we got it for $180 - too much for me, but my grandfather had recently died and my dad used that money as a down payment.

So even though the Ex's had no legal entitlement to the house, there was concern about their willingness to "take a crack at it" which would mean more BS for us and money to the lawyers to make it go away. There was a large chunk of family money tied in to the property and my business future was uncertain. All of that, in essence, had my dad wanting to retain control over the property. While I never tested my theory, I know for a fact that the terms were "we do it like this or good luck on your own". I was also less knowledgeable about these things at the time and did not have the information to propose another scenario. My dad had his own accountant and had done this in the past with my sister so I was in no spot to question things. 

Fast forward 4 years - my business is doing great, there is a grandson in the picture and there are no worries about bankruptcy, ex's or other issues that worried my folks. Meanwhile, houses down the street (not as nice as ours) are selling for $265k and I am in a position to start updating the house at very little cost through service trading. The plan is to take over the mortgage/title before the house appreciates any more because if CG is a reality, better to pay less of it now instead of more of it later (I know the CG's would be assessed to my dad, but I would be expected to cover it). To my understanding, my parents simply can't pick their selling price because we are not arms length- the house would have to be appraised to establish fair market value?


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## MoneyGal (Apr 24, 2009)

You know what? It sounds like your parents did a really great thing for you at a time of big personal and financial uncertainty for you. 

And to the extent that you are all doing well (good business! grandson! successful relationship!) they helped provide the foundation for your happy situation now to come to life. 

The fact that there may be some capital gains payable is maybe unfortunate, but in the grand scheme of things, you could look at it as a small price to pay overall. 

There may be ways for your dad to adjust his cost base now as a result of appraisal and other expenses (I'm not clear on what's possible in non-arm's length transactions). I hope you will consult a lawyer and/or accountant for professional advice to minimize the tax payable to the extent you can.


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## Eclectic12 (Oct 20, 2010)

MoneyGal said:


> You know what? It sounds like your parents did a really great thing for you at a time of big personal and financial uncertainty for you.
> 
> And to the extent that you are all doing well (good business! grandson! successful relationship!) they helped provide the foundation for your happy situation now to come to life.
> 
> ...


+1!

Then too - while paying taxes is never fun, given a choice - I'd prefer capital gains (CG) versus just about any other type.

It's also good that the OP is looking into options to confirm CG is unavoidable and to minimise it.


Cheers


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## dnswilson (Jan 2, 2012)

*Equity Pull-out*

You could also consider maintaining ownership of the original house, refinancing it to pull out some of the equity and renting it out to cover the mortgage.

I like the suggestion of characterizing the beneficial interest as yours, however.


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## blin10 (Jun 27, 2011)

why can't your parents just sign ownership to you which will become your house?


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## andrewf (Mar 1, 2010)

It's a deemed disposition, even if it is a gift.


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