Owning real estate has always been a great way to build wealth and create additional sources of income. Here are 3 ways that you build wealth with a rental property. The first is in pure cash flow that is generated month to month above your expenses. Second, is the fact that someone else is paying down the mortgage and third, the property may appreciate in value over time, creating a capital gain for you.
If your property has increased in value over time then you will have a taxable gain when you sell it. Deciding when to sell the property needs to be done strategically so that you do not experience a clawback on other government benefits, specifically your OAS.
Understanding the OAS clawback
The full OAS pension is available to Canadians who have lived in Canada for at least 40 years of their lives between the ages of 18 and 65. If you have lived in Canada for less than 40 years but longer than 10 years your benefit will be prorated accordingly. (1/40th for each year of residency) The OAS pension is also 'means-tested', which means that you only get it if your income is below certain thresholds. In 2022 that threshold is $81,761. Income earned above this amount will see a reduction in OAS benefits to the tune of 15 cents on the dollar (15%). Once you hit $129,757 of net income all of your OAS will be clawed back. That would be a loss of over $8,001 a year and more in future years.
EXAMPLE:
The threshold for 2022 is $81,761.
If your income in 2022 was $96,000, then your repayment would be 15% of the difference between $96,000 and $81,761:
$96,000 - $81,761 = $14,239
$14,239 x 0.15 = $2,136
Your income may very well be below these thresholds until you sell a rental property. When you sell a rental property you will have a deemed disposition in the year that you sell it and you will have to realize the gain and declare the income, which may result in a loss of OAS benefits if the gain pushes you past the threshold. If you own the property with a spouse it could mean a loss of benefits for both of you. The OAS clawback threshold is based on net income (line 234 on your tax return), which is not the same as taxable income (line 260).
How can you avoid all of this?
One way is to time the sale of your properties better. For instance, do not begin taking OAS benefits until you have dealt with the rental properties. You can delay receipt of your OAS until age 70. In fact, you will get an increase in your OAS for delaying. (.6% per month for every month you delay.) There is no added benefit for delaying past age 70. Please keep in mind that once you start taking OAS you cannot reverse your decision later.
You can hold your real estate until death and then it wouldn't matter as your estate will be responsible for the disposition and for paying taxes.
Before electing to start taking any government benefits you have to determine what impact that action will have on your total tax situation. If you have multiple income properties with significant gains you may have to sell them over several years. If you also have an RRSP you have to turn this into RRIF income by age 72, which can create more income and more tax problems.
When it comes to retirement income planning you can avoid a loss of benefits or unnecessary taxation with some proper planning. Sources of income in retirement are interconnected and have to be taken strategically. You don't want to take income in one hand only to pass it along to CRA in the next hand - make sure more of it stays in your pocket.
Feel free to reach out to us if you want help with any of this. We own multiple-income properties and work with many clients who do as well. We have specific strategies for creating tax-efficient, predictable income and can help you take that income in the right order.
We can help you create a sustainable and predictable cash flow from your portfolio in the most tax-efficient manner to ensure you never have to worry about running out of money.
Our business is all about helping clients declutter their lives by first getting their total financial house in order and providing the clarity and confidence to start enjoying their retirement lifestyle.
You can learn more about our flat-fee retirement planning process by clicking here.
Fee-only Retirement Income, Investment, & Tax Planning
Willis J Langford BA, MA, CFP
Nancy Langford CRS
