How JustAnswer Works:
  • Ask an Expert
    Experts are full of valuable knowledge and are ready to help with any question. Credentials confirmed by a Fortune 500 verification firm.
  • Get a Professional Answer
    Via email, text message, or notification as you wait on our site. Ask follow up questions if you need to.
  • 100% Satisfaction Guarantee
    Rate the answer you receive.
Ask Lane Your Own Question
Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 12686
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
1929974
Type Your Tax Question Here...
Lane is online now
A new question is answered every 9 seconds

Capital Gains Question: My parents have a rental property

This answer was rated:

Capital Gains Question:
My parents have a rental property they bought for $150,000 several years ago. The property is now worth around $500,000 dollars with a $350,000 mortgage. They want to gift me the property and for me to get my own mortgage for the $300,000 currently on it. From my understanding, there is no way for me to do this type of arrangement without the government forcing an instant capital gains tax on the $350,000 the property has gone up.Is there anyway we can push the capital gains forward until the event comes that I choose to sell it? If not what are my other alternatives? If we kept their mortgage and just added my name to the deed with survivorship does that trigger an instant capital gain penalty?
Customer: replied 27 days ago.
Just to clarify this is for Alberta, Canada.

I'm so sorry, but if a parent gifts an adult-child real estate, the CRA considers this transfer of ownership as a disposition: a virtual sale of the property at fair market value. As a result, the parent will owe taxes on any appreciable gain on the property (from when they bought the property to when they gifted the property).

...

The mortgage is irrelevant here. 1/2 of the gain is included in their income and taxed along with other income.

...

If this were there principal residence THEN the gain would be deferred until you sold, but your base for calculating that eventual sale would be the 150,000.

...

But, again, so sorry, this is what CRA calls a deemed sale. The GOOD news here is that your base for any future sale will be that Fair Market Value at the time of the deemed disposition (when title is changed to you)

...

The combined federal and Alberta tax on the 350000 gain will depend on their other income for the tax year. If this were their only income it would be taxed as follows.

...

Total income $ 350,000 (all capital gain income)

Federal tax $ 37,158

Provincial tax $ 16,830

Total tax $ 53,988

After-tax income $ 296,012

Average tax rate 15.43 %

...

The last several dollars of that are taxed at a marginal rate of 42% (combined federal and Alberta) so the more other income the more of that gain to be taxed at the higher rate, as the gain comes on top

...

If you'd like to give me their TOTAL income I can run the numbers for you

Customer: replied 27 days ago.
If their total net income was $100,000 what would it be? How is fair market value determined would the city assessment of the property be something we could use? Also, what would be the situation if we were to just add my name to the deed instead?
Customer: replied 27 days ago.
Also, if money was put into the property over the years would that get added ontop of the $150,000 purchase price to lower the overall gain?

Here is is a 100 ordinary and 350 capital gain

...

Results

Total income $ 450,000

Federal tax $ 68,359

Provincial tax $ 30,213

CPP/EI premiums $ 3,400

Total tax$ 101,972

After-tax income $ 348,028

Average tax rate 22.66 %

...

Fair Market Value is based on sales of like kind property (same area, same quality of housing)

...

Regarding adding to the title, they will be deemed to dispose of the portion transferred to you, here ... again this CAN work well for a primary residence where there's an exclusion, but any transferring of rental property is a deemed sale, even if it's only a partial interest.

...

Yes, on THE IMPROVEMENTS, that does get added to the base.

...

And yes, Tthe market value based standard is used to determine the assessed values for the majority of properties in Alberta. Market value is the price a property might reasonably be expected to sell for if sold by a willing seller to a willing buyer after appropriate time and exposure in an open market.

Customer: replied 26 days ago.
How is fair market value then determined do we submit what we belive to be fair market value based on comparables we document and then its either accepted or not?In the deed scenario, what if we were to do 10-20% ownership a year over a few years would that then lower the overall upfront capital gains?
Customer: replied 26 days ago.
Also, for the money put into the place is that any costs spent on fixing/improvements to the place over the years? and if that dates back 20 some years do we need to track down all previous tax returns to total up the amount invested over the years?

Sorry ... I didn't see that you had come back.

...

You just report the gain and keep for your documentation how you determined Fair Market (tax assessment given Alberta's method will suffice) and then only in the event of an audit would you be asked to document.

...

On doing the yearly gifting, yes it certainly would. You can see how the tax rates progress from low to high here"

http://www.taxtips.ca/taxrates/ab.htm

...

On the improvements, again, it would only come up upon audit, and (I don't see any audit flags here) if there were really an audit, I think talking to suppliers and contractors would suffice - maybe get something in writing if there WERE an audit.

Please let me know if you have ANY questions at all, before rating me.

If this has helped, and you DON’T have other questions … I'd appreciate a positive rating (using the stars or faces on your screen, and then clicking “submit")

I hope that you’ll rate me based on my accuracy and thoroughness, rather than any good news/bad news content.

That’s the only way JustAnswer.com will credit me for the work here.

Thanks,

Lane

I hold a law degree, with concentration in Tax Law, Estate law & Corporate law, an MBA in finance, a BBA, and CFP & CRPS (Chartered Retirement Plans Specialist) designations, as well - I’ve been providing financial, Social Security/Medicare, estate, corporate, non-profit, and tax advice on three continents since 1986

Lane and other Tax Specialists are ready to help you
Customer: replied 26 days ago.
Thank you Lane. I believe we have a reasonable plan in mind now :)

Glad to help. Thanks so much for the rating.