Rent or sell house after parents move to retirement home?

sell house

Q: My 91-year old father just moved into assisted living. His townhouse is in my name. It has no money owing on it. Unfortunately, it looked like a time warp circa 1979. We will spend just under $20,000 renovating it. We borrowed this money on a low-interest loan.

The home is in a nice section of town in Prince George, B.C. Renting seems like a long term play but risky, just after we put so much money into it. It is in a strata, which has a monthly cost of $200. We could expect monthly rent between $1,000 to $1,200. Does renting make financial sense?

—T.

A: Your situation is pretty common these days, T, as baby boomers are tasked with managing their aging parents’ finances. There isn’t exactly a manual on best practices either.

I’m assuming that your father has sufficient pension income or other resources to fund the assisted living costs, so that the income or the proceeds from the townhouse are not crucial for his day-to-day well-being.

You mentioned that the townhouse is in your name. Do you mean it’s 100% in your name or it’s joint with your father? If it’s 100% in your name, one thing to consider is that if you own a home of your own, you may have a capital gain when you sell your father’s home as you can’t have two tax-free principal residences.

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If it’s held jointly with your father, assuming he added your name for estate planning purposes only, your father may still be able to claim a full principal residence exemption on sale. That said, if he’s in assisted living now and not ordinarily living there, delaying a sale may attract some capital gains tax, T.

If there are other people, like your siblings, who are beneficiaries of your father’s estate, you should seek input from them assuming the house proceeds are also meant for them.

And if the property is beneficially your father’s and your name has just been added legally, remember that the same logic applies to the house proceeds if you sell it. That is, the money is still technically your father’s money while he’s alive, even if it goes into a joint account.

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I’m cautious about doing a renovation before the potential sale of a property, especially one as dated as your father’s. I’d definitely seek input from a realtor as to what to do and what not to do as renovations are often based on personal taste and may not return 100 cents on the dollar. Renovations for listing purposes should at least be high priority, marketable and ensure widespread appeal.

Even if you rent, I think you want to try to ensure your renovation money is well-spent to maintain the property, appeal to renters and eventually appeal to buyers.

Of note is that if you do rent the property, the interest on the borrowed money for the reno will be tax-deductible against the rental income, T. Rental income is taxable on your personal tax return, with an offsetting deduction for eligible interest, strata fees, property taxes, insurance, utilities and other associated costs.

Renovations are generally not deductible like other expenses, but get added to the cost of the property for tax purposes and you may then claim depreciation (capital cost allowance) of up to 4% per year on a declining basis.

Whether renting is the best option depends in part on your other options. If you would otherwise invest fairly conservatively, you might only be able to generate 2% interest or less on the net sale proceeds (back out real estate commissions, legal fees and as mentioned earlier, capital gains tax if applicable from what you’d ultimately have to invest).

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If you would invest more aggressively, is this money going to stay invested the same way upon your father’s death? If so, a balanced portfolio might generate 4-6% over the long run and an all-stock portfolio might generate 6-8%. Will real estate do better? It’s hard to say.

But when evaluating the real estate, start with what you expect the rental income to be, T. You said between $1,000 and $1,200 per month and net of your strata costs of $200, you’re looking at $800 to $1,000. Depending on property taxes, insurance and incidentals, your net rental income might only be $600 to $800, let’s say. So let’s use the midpoint of $700 for our calculations.

As a landlord who already owns a potential rental property (as opposed to one who was thinking of buying a specific property), I think I’d want to be aiming for at least a 4% capitalization rate, meaning if $700 per month ($8,400 per year) was under 4% of the property value, you might consider selling. If you could only generate $700 in net rent per month and the property value was more than $210,000, you should possibly be considering your options. So if the property could sell for, say, $225,000, I think you need to at least consider selling. If, on the other hand, it would fetch much less than $200,000, you might have a decent yielding investment property.

Regardless of how the numbers shake out, I think you also need to consider simplicity with a rental property. If you live in Vancouver and the property is in Prince George and it would be a hassle to manage, you might lean more towards selling. Even if you’re in Prince George, if your time and attention would be better allocated to your father’s care, you should also consider selling.

Hopefully this helps you weigh your options, T. In the meantime, I hope your father’s transition to assisted living is an easy one for all involved.

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Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.

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About Jason Heath, CFP

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.