When partners (both romantic and business) split up, selling your investment property or properties can cost thousands in capital gains tax—unless you follow this strategy.
Couples and business partners calling it quits may no longer want the responsibility of a shared investment property or properties.
When an investment property appreciates and is then sold, there is a capital gains tax paid to the government. While the amount owing will vary, the government will need to know how much the gain is, how many owners there are and their percentage of ownership. Your capital gains tax is calculated based on your marginal tax rate.
Here’s How It Works
Apologies of this gives you math class flashbacks. The gain on the value of the property is divided by the ownership percentage of each owner, then multiplied by the marginal tax rate of each person. This will give you the capital gains tax per owner. Look at it like this:
Capital Gain Consideration ÷ Ownership Percentage x Marginal Tax Rate = Capital Gains Tax
So, let’s say Steve and Nicole purchased a property for $1,000,000 when they were married. Now, they are getting divorced and want to sell the property. They sell it for $1,500,000—a $500,000 gain.
There will be a capital gain consideration for only 50% of the $500,000 gain. That’s $250,000. So, if each of them owns 50% of the property, that’s $125,000 each. Follow so far?
Take this figure and multiply by Steve and Nicole’s marginal tax rate—let’s assume 40%.
$250,000 ÷ 50% x 40% = $50,000 in capital gains tax for both Steve and Nicole. Can they save on capital gains and build wealth at the same time? Yes!
How do they do it? If you are separating or divorcing and selling an investment property or properties, make an RRSP contribution in the same tax year that the capital gain from the investment property occurred. Some or all of the RRSP investment will offset the capital gain.
Let’s go back to Steve and Nicole. They decide to each take $50,000 from their respective equity from their investment property and make an RRSP contribution. Each of them now has increased their wealth by $50,000 and reduced the capital gains tax exposure.
When couples or business partners decide to part, the road isn’t always easy. Some people are very reasonable and settlement-focused, while others make things more complicated. Separation Mortgages is Canada’s first and only service dedicated to separating couples that need Separation Mortgage Financing. We’re here to provide the resources and advice you need to make sure you can grow your wealth strategically, effectively and decrease your tax exposure, just like how we assisted Steve and Nicole.