If you wait till after you retire to sell a property, you could reduce the taxes you’ll have to pay
In the regular feature Your Questions, Olev Edur provides answers to questions from our readers regarding their rights, personal finance, and estate planning. Here’s one on the taxes due when you sell a property.
Q. I’m 60 and hoping to retire in two or three years. About 15 years ago, I bought a duplex jointly with a lifelong friend because neither of us could afford to buy places on our own. Two years ago, my friend got re-married, and he and his wife wanted to move into the house she already owned, so I used my savings to buy out his half of the property. Since then, I’ve been renting out that half of the house for $1,000 a month. I declare the income (minus expenses) on my tax return every year. Since I have exclusive use of the basement and main floor, I’ve been claiming two-thirds of the property as my own and declaring one-third (the upstairs apartment) as a rental property. When I retire, I’d like to sell this property and use the money to buy a condo. What would the tax implications be sale? Can I claim the property as a principal residence, or does the rental component mean I can’t? Would I have to pay gains tax on the full sale price? The property was $200,000 when we bought it, but it’s now worth $650,000.
A. No, you won’t have to pay tax on the full capital gain of $450,000 ($650,000 minus $200,000) because, as you say, two-thirds of the property is your home; assuming you don’t have any other properties, you can claim two-thirds of it as a principal residence and thus exempt that much of the gain from tax. In other words, only one-third of that $450,000 gain should be taxable and, since only one-half of any capital gain is taxable, you would be liable for tax on $75,000.
The way the tax calculation works is that you would add the $75,000 to your other income for the year and then calculate your total tax on that basis, but this may raise an interesting potential tax-saving opportunity. The higher your other income, the higher your total tax bill will be, so if you wait until after you retire to sell, when your income will presumably be lower, then the tax on this sale could be lower, too, because you may be able to avoid having your income rise into a higher tax bracket. And of course, your duplex may rise in value in the interim, adding to your after-tax profits.
Of course, this is assuming that you’re financially able to wait until retirement to sell. And you’ll have to calculate how much difference this will actually make based on your total income tax bill for either scenario to determine if the wait is worthwhile, but ideally it could mean several thousand dollars in tax savings.
Photo: DebraLee Wiseberg.