Nice try

Two years ago the 73-year-old guy who owns 1281 McBride Street – a bungalow in North Van – listed it for $1.6 million. Big lot. Decent four-bedroom house. Hot market. Asking a smallish premium over assessed value.

But, no sale. And no wonder.

He wanted to have his cake and eat it, too. The owner’s MLS listing said he was willing to sell, but not move. Not until he was carried out. He was offering a ‘life estate’ to be registered on title so that when he died the new owner could take possession, and in the meantime he’d pay expenses, plus $2,000 rent. No mortgage is possible for a life lease situation, so the owner also said he’s consider extending financing over ten years.

Here’s the house.

Well, now the dude is 75, and he’s trying again. This time the ask has been seriously reduced – to $1.25 million. However, no rent offered. And he still wants to stay there until he crosses the finish line. Says the listing…

Long term investor alert! This is a unique opportunity. Seller will remain resident after completion via a Life Estate registered on title. Will remain responsible for the utilities portion of property taxes, cost of insurance, all repairs & maintenance but no rent payable. Life estate will be released for owners possession of the property upon the seller’s death or moving out of the home permanently (to a care facility for example). Seller is 75 years old. Serious investors only please. Ask about possible vendor financing.

Is this a legal strategy? Does it make any sense for someone to plunk down $1.25 million for, maybe, ten or 15 years with no return in order to secure the property?

Well, yes, it’s legal. When the life tenant croaks the next person entitled to own it, validated by a land transfer, takes over. Until then the tenant can occupy the place while managing it and keeping it in good repair. The benefit to the owner is obvious. He gets $1.2 million. Tax-free since this is a principal residence sale. He stays in the house, rent-free. He never has to move. He has capital to invest and funds to pay for utilities, upkeep and taxes.

What about the buyer? Not so simple. Over such a period of time the funds – if invested in a conventional diversified portfolio – might double (at 7%), resulting in about $2.5 million. Hmmm. But what if the investor was willing to gamble on North Van prices continuing to be unrealistically weird and crazy for ten more years, resulting in the bung being worth $3 million at the time the current owner is wearing wings and a harp?

Cool. Sounds like a reasonable bet. (And a lot of parents have been doing the same with their kids – selling out now and staying in place.)

But wait. Taxes.

At the moment the place is sold via a life estate there’s an established value. In this case, $1.25 million. The PR capital gains exemption is claimed and the seller’s happy. Ten years later the investor assumes ownership of a property now assessed at $3 million. S/he then faces a bill for capital gains taxes on the increased value – $1.75 million. That could result in the CRA looking for approximately $300,000. In cash. Now, please.

So the buyer gives up cash flow on a significant lump of money that might have doubled in ten years or more, then faces a capital gains situation which could well force liquidation of the property, which would cost eighty grand in commission. Do the math. Is it worth the risk?

And what if the seller paid rent to the buyer while entering into the Life Estate?

Then there’d be cash flow, but rent is fully taxable and added to the income of the seller. This could push hm/her into a higher marginal rate situation. Meanwhile there would be little expense to claim against that income, since the seller was obligated to pay routine overhead, including maintenance.

Well, nice try old guy. You could have sold in a wink in early 2022 if you were willing to be a normal person and move out upon closing. The extra $400,000 received then would come in handy being invested, or helping to offset rent on a nice condo overlooking Vancouver Harbour.

Maybe the moral of this story is to not let your house make decisions for you. After all, it’s just a place. It’s not you. Home is wherever the dog sleeps.

About the picture: “Long time reader long time non-poster here,” writes Jeff. “I was wondering if you and your band of merry number nerds could shed some light for the blog dogs on the subject of crowd funding real estate investments such as Addyinvest.ca. I see all kinds of risk with LTV etc. and was wondering what your thoughts are.  They make throwing money into these “investments” far too easy which is a major red flag for me. The stud in the photo is Levi, a dog that’s made more of an impression on my life than many people I have known over the years. Such a unique personality.”

To be in touch or send a picture of your beast, email to ‘[email protected]’.