Do you own multiple properties? Consider this...
Owning multiple properties can be a very lucrative investment and a great way to diversify a portfolio, but it also amplifies your tax consequences
Have you ever walked into the break room in the office and discovered a box of donuts emitting a heavenly glow and whispering your name? You know you probably shouldn’t, but quickly find an inner debate has erupted… “well I did get the salad instead of fries at lunch….?”. YOLO, I think the kids are saying these days. It’s settled, you deserve it. As you open the box you are horrified to discover the selection has been savagely picked over and all that remains is the unpopular “old fashion plain” (my apologies to OFP fans).
The same concept applies to your family’s estate when you pass away. Before you receive what has been intentionally left to you, the government will first take their cut.
Owning multiple properties can be a very lucrative investment and a great way to diversify a portfolio, but it also amplifies the tax consequences for your estate upon your death. Typically an estate that is real estate heavy will have wealth that is not in liquid cash, but instead in the form of equity in your properties.
When faced with this issue, there are 3 common strategies to satisfy the CRA’s sticky fingers.
You can borrow against your assets
- Let’s say you borrowed $500,000 to pay for taxes, you would have to pay back that amount with after tax dollars. This means you could be paying back $1,000,000 plus the interest from borrowing
- This is an option, perhaps not the best option
You can sell some assets
- One thing to keep in mind with this option is that there exists a market for your best assets
- There may be an asset you want to sell but if there are no buyers you could take a huge loss or sell property you don’t want to!
- What happens if you’re caught in the wrong part of a business cycle? You would be selling low and losing future growth
- This also is an option, but you’re banking on a sellers market
- You’ll pay pennies on the dollar that will be received tax free
- You get to keep your real estate and enjoy its full growth
- It’s fast
- Both term and permanent insurance are effective, however in most cases this is a long term & permanent need
“Having term insurance for a permanent need is like wetting the bed – eventually you’ll have to wake up and change the sheets”
When properly planned for, your heirs can enjoy the maximum value from your estate. Real estate is a good investment and a great way to diversify your portfolio, but when the tax man knocks on the door, how will you pony up?
Wouldn’t it be nice to enjoy the Honey Cruller when dipping into that break room donut box?