# what would you do in my situation? (Calgary)



## captain charisma (Mar 10, 2010)

I will try and make this as much as to the point as possible in an effort to allow everyone to give their best 2 cents possible... 

I live in the SW of Calgary, own a 2 bedroom condo and I share a mortgage with my live-in girlfriend (we are practically married considering) 

We currently owe $345K on our condo with a 5.04% interest rate going into year 3 of our ownership. The quick math on this is roughly $1450.00 being paid in interest alone. (5 year term/25 yr mortgage/accelerated bi-weekly payments)

I also personally own a town home in B.C. which is mortgage free and I'm currently renting it out but can move back in at any given time. The rental income covers half of our current mortgage. The place in BC is not as nice but quite livable nonetheless. 


The place in Calgary is down roughly 12% from what we paid back in 2007 and would likely sell for approx $339K on the market today, add your realtor fee's, lawyers fee's, and the $$$ loss we would take on the current value versus what we paid...your looking at quite a loss. 

Clearly, we would still owe money on the current mortgage. (which I can make up in extra $$$ so thats not a problem push comes to shove)

so which scenario would you take? 

a) We hold out and hope the market rebounds (the $64,000 question for everyone crystal ball required) or take the financial hit and cut our losses. 

b) Rent it out - no sure bets we could rent it out but it would cover the majority of the mortgage provided we could find good renters. I would use a property management company since I would be out of the province. (I'm aware they collect 9-10% monthly)

c) pay the penalty to get out of the current higher mortgage (again, 5.04%) and get into a lower mortgage elsewhere and use a credit line loan using the equity available from the B.C. home (again, mortgage free) and use this cash to bring the principle down 80K-100K and hence...take on a lesser mortgage. 

d) I'm open to any of your suggestions I havent thought of? 

On a side note -I have approx 100K in my account sitting as I'm unsure to invest or pump into the mortgage. Unsure at this point. 

ALSO - I'M CONCERNED ABOUT CAPITAL GAINS TAX IF IT WOULD AFFECT US...I.E. WE ARE LIVING IN B.C. AND WE DECIDE TO SELL THE CALGARY CONDO SAY FOR EXAMPLE IN 3 YEARS, WOULD WE TAKE A MASSIVE HIT? (25-50%) SINCE IT WOULD NO LONGER BE OUR PRIMARY RESIDENCE. OR ARE THERE WAYS AROUND THIS? 


My GF feels we should hang on in hopes of the market rebounding and but part of me lives in fear of pumping $$$ into a property which I don't feel the market will rebound to what we paid back in 2007 anytime soon. (my guess it will be at least another 5 yrs before the market returns to what it was)

What would you do?? Any other advice related on the matter is much appreciated!! Thanks to all in advance!


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## Potato (Apr 3, 2009)

So you live in Calgary now, but are moving to BC no matter what? Or you would only move to BC if you decide to ditch the condo?

Other assets?

My opinion: I'm a bit of a real estate bear, and I also know some people that moved cities but decided to rent out their old places... so if you're moving to BC, I'd recommend not being a long-distance landlord and just sell the condo, even if it's at a loss. Furthermore, I don't think you can expect the market to turn around in as little as 5 years once the real decline does start (possibly with increasing rates later this year). It took ~16 years for Toronto to return to its 1989 peak. Calgary may be an exception if there's another mass migration there for O&G work though.

You have two properties, what are your other assets like? Just the $100k in an account? If real estate is hugely over-weighted (or essentially your only investment), that's another good reason to sell at least one of the properties.

For the BC property, is it in Vancouver or Victoria? Those cities are very bubbly (again, real estate bear speaking here), so it may also be a good one to sell, even if you're moving to BC. If it's below your standards ("livable"), you can probably find yourself a nicer place to rent for the time you'll be living there.

As for capital gains taxes, those are on _gains _-- if you just barely break even on the condo, or take a loss, there won't be any (and if you do have gains then the tax is not so painful).


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## andrewf (Mar 1, 2010)

There's an extension to option c that it doesn't sound like you've considered. You can start 'cash damming' using the equity on your property in BC. Basically, you can shift your debt from non-tax deductible on your Calgary property to tax deductible on your BC property. 

What you do is collect rent from BC property and use it to make lump-sum payments on your Calgary mortgage. You then pay any expenses related to the BC property (property tax, condo fees, insurance, property management fees, utilities, etc.--just not mortgage principle) with a LOC secured on the BC property. Any interest payable on the LOC can be paid with the LOC as well, and all the interest on the LOC is then tax deductible. In the mean time, you can accelerate the paydown of your Calgary property's mortgage by the amount of rent you collect each month from the BC property.

If you're curious, google 'cash damming'. There are one or two good articles on milliondollarjourney.com as well.


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## captain charisma (Mar 10, 2010)

Potato: thanks for the reply and insight. 

Just to clear a few things up. 

We are moving to BC no matter what. No other assets other than the 100K. The property is located in the fraser valley (Langley)

As per the Gains, yes I suppose that would be accurate since there would be little or no gains. (sorry folks, this is all fresh to me) 

Having said that, if I do hang on to it for the years to come and I do sell it...it would definitely not be a primary residence at that point. _Any idea on how you can avoid the gains tax all together or at least parts of it? _

I also have heavily considered the long-distance landlord situation and don't like the concept either. This is why I would consider using a property management company even if it means taking less $$$. _Anyone with any experiences with such companies? 
_

Part of me says maybe we should just look at the condo from a pure investment standpoint and ride out the storm before it eventually calms and re-surfaces (even if it does take years as Potato mentioned) 

_How do people on this forum and their experiences view such a approach? 
_

We are quite green on all these subjects so anyone with any additional advice is highly appreciated.


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## OhGreatGuru (May 24, 2009)

_ALSO - I'M CONCERNED ABOUT CAPITAL GAINS TAX IF IT WOULD AFFECT US...I.E. WE ARE LIVING IN B.C. AND WE DECIDE TO SELL THE CALGARY CONDO SAY FOR EXAMPLE IN 3 YEARS, WOULD WE TAKE A MASSIVE HIT? (25-50%) SINCE IT WOULD NO LONGER BE OUR PRIMARY RESIDENCE. OR ARE THERE WAYS AROUND THIS?_

How would you take a massive hit? You would have to make a massive capital gain in the first place. Right now it sounds like the FMV of teh Clagary condo is less than your purchase price (ACB). If teh market recovers and you do sell at a profit in 3 years, you won't be taxed on your selling proce, only the profit. 
- The Actual Capital gain will be your net profit. 
- Since capital gains have a 50% inclusion rate, your Taxable Capital Gain will be 50% of your net profit. 
- Your taxes on the gain will be at your marginal rate - if you are in the 50% bracket, your taxes will be 25% of your net profit at most. So you still clear 75% after taxes.
- If your GF owns half the condo you will be able to split the profit between your tax returns. 

In the meantime if you convert the condo to an income property, you can start writing off some of the ownership costs agaisnt the rental income.

But if you don't like being a long-distance landlord (and it takes a special kind of person to be a landlord at all) then maybe you should bail.

You should perhaps ask a tax consultant if it is too late to declare that your BC house has remained your "Principal Residence" for tax purposes. That might depend on how you have been accounting for your rental income up until now.


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## Potato (Apr 3, 2009)

captain charisma said:


> We are moving to BC no matter what. No other assets other than the 100K. The property is located in the fraser valley (Langley)



Ok, in that case my recommendation would be to sell the Calgary condo to diversify away from having too much of your net worth in real estate.



> Having said that, if I do hang on to it for the years to come and I do sell it...it would definitely not be a primary residence at that point. _Any idea on how you can avoid the gains tax all together or at least parts of it? _


Well, when you move out so that it's no longer your primary residence, you'll want to get an appraisal (if you're keeping it), and that will form the base cost for your future capital gains. To limit future capital gains, you want to try to make this appraisal come out as high as possible.

Other than that, there's not much you can really do: you can choose not to claim CCA on your yearly income for renting it out, but then you pay more every year rather than deferring it until you sell.

When/if you make the BC townhouse your primary residence, you may also need to get an appraisal of it and have a deemed disposition and pay capital gains on any appreciation from when you bought it until now, if it's been an investment property for you (I hope someone can confirm this point). This appraisal you want to come in low.

Really, capital gains taxes are a minor concern: you only pay them if you have a gain. Don't worry about that aspect of all this.



> I also have heavily considered the long-distance landlord situation and don't like the concept either. This is why I would consider using a property management company even if it means taking less $$$. _Anyone with any experiences with such companies?
> _
> 
> Part of me says maybe we should just look at the condo from a pure investment standpoint and ride out the storm before it eventually calms and re-surfaces (even if it does take years as Potato mentioned)



Well, look at it from a pure investment standpoint: by renting it out, will you make any money on it? How much rent do you need to bring in just to cover the mortgage interest, property taxes, condo fees, property management fees, maintenance, and a vacancy allowance? How does that number compare to what 2-bdrm units are renting for in your area?


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## OhGreatGuru (May 24, 2009)

_When/if you make the BC townhouse your primary residence, you may also need to get an appraisal of it and have a deemed disposition and pay capital gains on any appreciation from when you bought it until now, if it's been an investment property for you (I hope someone can confirm this point). This appraisal you want to come in low._

No. If you have a property that has been used both as rental and as principal residence, you still don't pay capital gains until you sell it (realizing the gain.) The proportion that will be tax-exempt is calculated by a simple formula using the number of yeaers it ws your princiapl residence and the total number of years you owned it. See Chapter 6 of T4037 and Form T2091 on this.

There is another option that I had not discussed. On page 40 of T4037 - Changing Principal Residence to a Rental Property, you may elect to continue to delcare as yur principal residence for up to 4 years even though you do not live there. This affects what you can claim as renatl costs; and of course it also means you can't claim the principal residence exmption for the BC house for those years, so I suspect you would eventualy be worse off.


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## OhGreatGuru (May 24, 2009)

In reviewing my hasty response of yesterday, and this morning's post, i realize your capital agains exposure is even less than I thought. I take it from your post that you have been treating your Calgary condo as your principal residence. When you sell it, you can still apply your principal residence exemption to a portion of the gain. (See T4037 and T2091). The formula for this is :
% exemption =(Years as Principal Residence + 1)/(Total years owned).

So, if you have owned it for 3 years, move this year, and sell it 3 years from now, 
your exemption =(3 +1)/6 = 66.6%. So 2/3 of your gain would be exempt anyway. Because of the "+1" factor you could actually postpone selling for a year and you would still not be exposed to any capital gains tax.

Yoiu might still be well advised to talk to a tax consultant about whether or not you are better off in the long run applying as much of your principal residence exemption as you can to your BC residence.


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## Potato (Apr 3, 2009)

OhGreatGuru said:


> > _When/if you make the BC townhouse your primary residence, you may also need to get an appraisal of it and have a deemed disposition and pay capital gains on any appreciation from when you bought it until now, if it's been an investment property for you (I hope someone can confirm this point). This appraisal you want to come in low._
> 
> 
> No. If you have a property that has been used both as rental and as principal residence, you still don't pay capital gains until you sell it (realizing the gain.) The proportion that will be tax-exempt is calculated by a simple formula using the number of yeaers it ws your princiapl residence and the total number of years you owned it. See Chapter 6 of T4037 and Form T2091 on this.


Ok, I was going by this part:

"You can be considered to have sold all or part of your property even though you did not actually sell it. The following are some sample situations:

* You change all or part of your principal residence to a rental or business operation.
* You change your rental or business operation to a principal residence.
Every time you change the use of a property, you are considered to have sold the property at its fair market value and to have immediately reacquired the property for the same amount. *You have to report the resulting capital gain or loss (in certain situations) in the year the change of use occurs.*"

http://www.cra-arc.gc.ca/E/pub/tg/t4037/t4037-e.html#P4321_160669


I see that formula in the T2091 though, I'll have to do some more reading. Is that for when you don't get an appraisal at the time the use changed, and for when the principal residence portion of use came first?


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## Berubeland (Sep 6, 2009)

Oh boy... 

Well in your situation I can see no other reasonable choice than to hire a property management company and wait... for the market to rebound or equity.

If you sell you lose $64,000 for sure immediately.

If you keep the condo you run the risk of vacancy, bad tenants, turnover costs etc. All of these are tax deductible. Further none of these costs are immediate.

I manage a property for a guy in BC and he never has to worry about a thing. He called me and hired me from there and I had the place rented out continuously for 3 years now. For all my troubles I make about 140$ a month. You can expect the same. I suggest you look for a company like mine that does rentals and some property management on the side. 

The idea that you should sell and lose 64% of your nest egg because you are too invested in real estate is nonsense.


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## andrewf (Mar 1, 2010)

Berube: his investment in the property is sunk, and shouldn't be considered in his decision (imagine he has a dollar or a million dollars invested in the condo). The consideration should be return on equity going forward, and risk. I think the risk is moderate, but the potential is there for high rates of return.


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## Berubeland (Sep 6, 2009)

andrewf said:


> Berube: his investment in the property is sunk, and shouldn't be considered in his decision (imagine he has a dollar or a million dollars invested in the condo). The consideration should be return on equity going forward, and risk. I think the risk is moderate, but the potential is there for high rates of return.


I understand what you are saying but one option has him paying $64,000 in cold hard cash today for the expenses of selling the place basically decimating his net worth. 

The second option has him keeping his cash and possibly having to pay say $400 per month to make up the difference for his mortgage and maintenance fees. Plus the rest of what the tenant will pay will increase his equity eventually so he doesn't sell at a loss. Plus inflation will be working it's magic on eroding the purchase price and increasing the rent. 

Cash is king.


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## andrewf (Mar 1, 2010)

I don't think we're disagreeing. Although th claim that selling now would hurt his net worth more than selling at another time doesn't make much sense. The damage to his net worth has already been done through the decline in the property market.


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## sprocket1200 (Aug 21, 2009)

i agree. you have to take the zero cost approach. what would you do today if you were to start over completely. you can't hang onto hoping to recover the current net loss without risk. you have to consider the opportunity cost of hanging on to making it back to the irrelevant original purchase price. this is the same for any investment.

with interest rates headed higher, a potential property manager taking their cut, the hassle of the rental being in another city (province even!), I would just cut the losses before the price falls/stagnates further.

i think it is better to figure out what to do with that 100k that is sitting idle and why it is being allowed to do that. this will help your investing career much more than waiting for the condo to appreciate to what you paid...


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## resmoreca (Mar 4, 2010)

I won't give any advice either way (that's been covered well from what I can see), but I'd like to share a five minute calculation with you. To calculate a realistic before tax yearly gain (or loss) on renting it out I use the following (I built a spreadsheet to model this but the calcs are simple):

Monthly Rent: Y
Vacancy factor (CMHC keeps this data for most cities, search their site): 0.1
Rent after vacancy factor: Y1 (this is rent multiplied by 1 - vacancy)
Maintenance: -X (use a realistic number to cover items not covered by your condo fees)
Condo Fees: -X
Utilities: -X (if you will be paying them)
Taxes: -X (Divide yearly property tax by 12)
Management: -X (I'm guessing this will be at least 10%, but easily more)
Mortgage Payment: -X

Now take the net of the above and multiply by 12 to get your before tax yearly gain or loss. A lot of prospective landlords won't think of maintenance, taxes, vacancy, and utilities so they think they're earning $100 a month in cash flow when in reality they aren't. Or atleast all it takes is one broken appliance and they're cash flow for the past year is gone.

You can do a similar exercise to get after tax gain or loss by integrating your tax rate into each, but that's harder to explain on a message board. You also need to incorporate CCA. The after tax number is what you want to use to make your decision in the end, but the before tax number is a good starting point I think in your case, to see how bad it would be as far as negative cash flow.


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