Owning multiple investment properties is arguably the best possible way to create wealth. Because there is never a shortage of people looking for a place to live, it’s a relatively safe investment. With real estate, it’s usually possible to generate a positive, or at least neutral, cash flow. And since the value of properties almost always increases, you can be sure to turn a significant profit.
When looking to upgrade your primary residence, selling off investments is a superb way to fund your purchase without incurring heavy debt. The question is, should you sell multiple properties to upgrade your family home? Or is it better to use the equity you’ve built and take out another mortgage?
As with any financial decision, both scenarios have advantages and disadvantages. If you take on more debt, you’ll have to pay interest on the loan. Increased debt also raises your debt to income ratio, which may make it harder to obtain financing when you want in on a new investment opportunity.
The Advantage of Selling Multiple Investments
When you sell your investments to buy a new primary residence, you may be able to afford a cash purchase. In the case of a bidding war, a cash offer is extremely attractive to sellers. Some developers may even offer a discount or other concessions on new-build homes.
However, selling a few of your investments gives you more than an influx of cash flow. You also have more free time to spend with your family doing the things you love. Fewer properties to manage mean fewer headaches and more peace of mind.
The Downfalls of Selling Your Investments
The most immediate disadvantage is the loss of income that your investments generate. The more properties you sell, the more income streams you lose, not to mention the loss of generational wealth for your children and grandchildren. And let’s not forget the dreaded capital gains tax.
Investment properties aren’t covered by the Primary Residence Exemption (PRE), which means you have to pay tax when you sell. Even this has good news and bad news. The good news is that the government wants you to invest your earnings back into the economy, so only 50% of your gains are taxable. The bad news? You have to pay tax on the other 50%.
To make the math easy, let’s say you bought an investment property for $1,000,000. It has now doubled in value, and you sell it for $2,000,000. You have just made a profit of $1,000,000, and at 50%, $500,000 is now subject to the capital gains tax.
This means adding $500,000 to your income for the year, which can hurt come tax time. You have even more profit when you sell multiple properties and will get hit even harder. But take heart.
There are several beneficial and legal ways to minimize the impact of the capital gains tax.
Contribute to a tax-sheltered investment, like an RRSP, TFSA or an RESP. All three programs allow you to re-invest your proceeds without paying tax until you withdraw the funds.
Offset your gains with “Tax Loss Harvesting.” I recommend consulting with a professional financial advisor before attempting this strategy. However, it may be worth looking at to avoid paying massive capital gains taxes. In a nutshell, you sell an investment that has decreased in value and then purchase a similar investment immediately afterward.
Capital Gain Reserve. If you’ve made a significant profit by selling an investment, you’ll want to look into the Capital Gain Reserve. How does it work? Instead of claiming an extra $500,000 for the year, you can claim $100,000 over the next five years. Because the Canadian tax rate increases with your income, spreading your profit out will save you thousands of dollars in taxes.
Donate to a charity. You can decrease your tax amount by up to 20% when you donate to a registered charity. You save money, and you also help a worthy cause. Talk about a win-win!
Are you interested in buying or selling investment properties in Toronto? You can find some of our other resources to help you below:
- Upsizing as an Investor – Why it Works
- What Makes a Good Investment Neighbourhood in Toronto
- Four Real Estate Investment Strategies to Consider
Why Act Now?
The tax rate for Capital Gains is at 50% and has been for some time. However, there is nothing to stop the government from raising the rate. With the debt incurred from billions of dollars in COVID assistance programs, they are undoubtedly looking to find ways to recoup those funds. Raising capital gains is one way they could do it. They’ve done it before. In 1988, the Canadian government jacked the rate up to 75%. Any profits from selling your property before this happens would still only get taxed at 50%.
Selling off some of your investment properties might be the best way to fund your new dream home, but it isn’t a decision to make lightly. It’s always best to consult with a real estate agent with experience in investments before taking action.
Want expert guidance before buying or selling an investment property? We have 36 years of experience helping clients maximize their returns and minimize their risks. Contact us today to talk about your needs, by emailing us at info@christensengroup.ca or calling us at 416-441-2888.
