Should I Rent or Buy a Home in Canada?

Allan Madan, CA
 Jan 7, 2016
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Are you looking to downsize but don’t know if you should rent a property or buy? When the time comes to downsizing from your home to an apartment or condo, it is difficult to decide whether renting or owning a property is the right strategic move for you. There are many financial and emotional factors that you must consider.

Let’s Look at an example:

Jerome and Janet have approached retirement and are looking to downsize their home to a smaller apartment. But they are not sure if they should rent or buy. Their current home is worth $1.0 million and after covering moving expenses, real estate fees, and other selling costs, the home’s value is now $900,000. Both Jerome and Janet plan to invest the proceeds from the sale.

The total return from these investments will give the couple monthly income of $5,500 , after taxes.
If the couple chooses to rent, the monthly investment income would help them cover their monthly rent payments of $3,000 per month.
On the other hand, if the couple chooses to invest the money they have leftover from selling their home into purchasing a condo, they would have to pay regular monthly expenses such as maintenance and utilities, property tax, insurance and such for a total of $3,500 per month.

What would be the best financial decision for them?

For Jerome and Janet, renting is the cheaper option in terms of cash flow. This is because, after their monthly rent expense, the couple is still left with $2,500 from their investment income. They are essentially living rent-free. However, in some cases, owning property may be a better long term investment.

Let’s say the rate of appreciation for the condo is 6% per year over the next 10 years. At the end of ten years, the condo Janet and Jerome purchased for $900,000 will be valued at a little over $1.6 million. They would have an economic gain of over $700,000 by the end of year ten and because this is their principal residence, they get a tax exemption on the gain making it tax-free.

So Here’s the Tip:

In the end, the choice of renting or buying is a financial decision. So if you are looking to live rent-free, selling your home and investing the proceeds may be the better option for you. However, if you are interested in gaining a profit from selling your property, then you will want to consider buying.

Disclaimer

The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.

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Comments 4

  1. Hi madan,
    I have question on the primar residenship of the condo they bought post selling the first home.

    They would have claimed the prinicipal residenship on the home already and whether they are eligible for the primary residenship on the condo too?

  2. Hi Madan,
    If some one rents the home for 2 years and than move in the same home and live there for 3 years and than sell after will the capital gain be tax free.

    In Second scenario if some one live in the house for 2 years and than rent out for 3 years and than sell how the capital gain applies in this scenario, thanks

    1. Hi Santosh,

      Let’s look at two examples to answer your questions properly:

      Scenario 1:
      – You purchased a home for $400,000 and immediately began renting it to a tenant.
      – You moved into the home 2 years later and the tenants left. At that time, the home was worth $500,000.
      – You sold the home in year 5, after living in it for 3 years. The sale price was $750,000.

      In this example, a capital gain of $100,000 ($500,000 less $400,000) will be triggered when you move into the home in Year 2. One half of the capital gain will be included in your personal income. This is because you changed the use of the home from a rental property to a primary residence.

      Furthermore, the appreciation in the home from $500,000 to $750,000 will not be taxable when you sell your home, because you lived in your home during that time (years 3, 4 and 5). You can claim the principal residence exemption toward the entire gain of $250,000 ($750,000 less $500,000).

      Scenario 2:
      – You purchase a home for $400,000 and immediately began living in it. You lived in the home for a total of 2 years.
      – You moved out in Year 3 and began renting the home to a tenant. At that time, the home was worth $500,000.
      – In year 5, you sold the home for $750,000.

      In this example, a capital gain of $100,000 ($500,000 less $400,000) will be triggered when you move out of the home and is renting it to a tenant. This is because you changed the use of the home from a primary residence to a rental property. However, you can claim the principal residence exemption for $100,000, because you lived in the home during that time. As a result, the net capital gain will be $0.

      Furthermore, the appreciation in the home from $500,000 to $750,000 will be taxable when you sell your home because it was a rental property during that time (years 3, 4, and 5). One half of the capital gain will be included in your income, i.e. $125,000 ([$750,000 – $500,000] x 50%).

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