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Lots to consider

Couple with three properties ponders selling rules before retirement

Hey there, time traveller!
This article was published 18/3/2011 (2346 days ago), so information in it may no longer be current.

Kenneth and Barbara are on the verge of retiring. Kenneth, 58, could retire tomorrow if he wanted.

A teacher now working in management, he earns a yearly salary of $136,000 and will get an estimated monthly pension payment at age 60 of $6,127, although he is eligible to receive it now. Barbara, 53, works part-time, earning about $6,000 a year.

‘The main thing we’d like is to understand whether we can have the kind of retirement we’d like to have’

PHIL.HOSSACK@FREEPRESS.MB.CA

‘The main thing we’d like is to understand whether we can have the kind of retirement we’d like to have’

Between the two of them, they have more than $119,000 in RRSPs, about $30,000 in tax-free savings accounts (TFSAs) and more than $73,000 sitting in savings.

But the majority of their wealth is tied up in three properties. Their home is valued at $350,000 and is free and clear. And so is their cabin near Lake of the Woods, worth about $275,000.

In addition, they own undeveloped land in the Maritimes worth about $175,000 purchased a decade ago for $58,000.

"The main thing we'd like is to understand whether we can have the kind of retirement we'd like to have," says Kenneth, 58. And that involves spending about five months in Arizona as snowbirds and relaxing the rest of the year at the lake.

Yet they are contemplating selling the properties and purchasing a more accessible cabin in the same area, and buying a manufactured home in the United States. They say they believe they can afford this plan, but they want to know more about capital-gains taxes and the principal-exemption rule on real estate.

And they also question whether Kenneth should still contribute to a spousal RRSP, considering they'll be able to split their pension.

"Will I not be paying more tax at that point on what I take out from the RRSP because my income has increased?" Barbara asks.

Certified financial planner James Kirk says this couple has done everything right early on to set themselves up for the future, but they also need to get serious about tax planning and get a clearer picture of what they would like to do with their money.

The fact is they will likely have more money than they need to meet their goals.

With no kids, it's likely they do not need to leave much of an estate, unless they want to leave assets to relatives or charities.

"They can't take it with them, so what do they want to do with it?" asks the adviser with Sweatman Insurance and Retirement Services in Winnipeg.

They also need to discuss risk versus return on their savings. "They have some flexibility with their finances," he says, adding Kenneth's pension will provide more than $70,000 a year gross.

They don't need to stretch for returns by taking on risk, but they need to be aware of the risk of having too much money in cash -- or potentially worse, locked in low-yielding GICs -- when inflation begins to creep up again.

The decision of what to do with their money will only become more pressing when they sell their properties, because Kirk estimates they will have at least $75,000 more to invest after completing the land transactions and purchasing two new properties.

Inflation, however, is more of a medium-term concern. For the near term, their biggest consideration is the tax implications of the sale of their properties. And to help guide them, they really require the help of an accountant, he says.

Here's why.

They are allowed to declare one of their properties as a principal residence, which provides them with an exemption on paying taxes on any capital gain on the property. The trouble is, they have to pick one of the properties, which isn't always clear without advice, Kirk says.

But they can start by crossing the Maritimes property off the list.

"You can only use the principal residence exemption where you've actually got a residence," he says about the undeveloped land.

On that land, they'd be looking at a capital gain of about $117,000. That's the estimated market value minus what they paid for it and any costs involved in improving the land, something they didn't do.

Property taxes do not count as deductible expenses, he says.

Of their profit, only 50 per cent is taxable, so they would pay taxes on about $58,500, and the tax rate depends on Kenneth's income.

With the Maritimes out of the picture, that leaves them to choose between the home and the cottage.

"If there's a larger gain on the cottage, for example, they would choose to designate it as their principal residence for the time period that they owned it," he says.

In turn, they could declare their home as their principal residence prior to the time they purchased the cabin, receiving a tax exemption on any gains between the time they bought the home and purchased the cabin.

"It could be a situation where their house in Winnipeg was designated a principal residence from 1975 until 1985 -- the year they acquired the cottage property," he says. "Then they could designate the cottage property as principal residence from 1985 to 2012 when they sell it and, consequently, they could shelter the larger capital gain for those years and bite the bullet and pay the tax on the gain on the house over that same time."

Furthermore, they need to discuss timing. It's best if they don't sell the Maritimes property and the residence that isn't exempt in the same year because they could wind up paying the highest marginal rate on the capital gains for both.

Considering Kenneth's high work income, it may be best to wait until he retires to sell non-exempt properties when his income will be lower.

For the time being, however, they should definitely continue maximizing their TFSA and probably do the same for the spousal RRSP contributions.

"The fact that she's five years younger than him makes me think that it's a good idea to make spousal RRSP contributions," Kirk says. "They can defer paying tax on spousal contributions from his income for 18 years because she doesn't have to withdraw it until she turns 71." Yet this strategy, too, bears a closer look in the context of their overall tax strategy, he says.

Overall, however, Barb and Kenneth are in an enviable position.

"They have enough money," he says. "They just want to maximize their opportunities so they can focus on the important things in their life."

giganticsmile@gmail.com

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