What tenants need to know about buying out their rental

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A capital gains reserve could be a possible strategy for your landlord. It may or may not save him tax, depending on his usual sources of income, but it is important to note there is an opportunity cost to him to not have his money from the home sale all at once, as well. 

You and he may structure the sale so that one-fifth of the purchase price is payable each year for five years, with interest payable on the outstanding balance. 

If the estimated tax is $50,000, I am guessing the capital gain is about $200,000. That may not be a large enough gain to warrant a five-year timeline for the transaction, but even doing it over two years with payments in December and January could help with his tax bill. 

You and the other tenant may be able to borrow the money from the bank to pay him back each year. However, there should be no need to recalculate the tax each year, as the sale price would generally be based on the price determined in the first year. For both your benefit and his, you would likely want the price to be determined upfront, rather than valuing the property and literally buying a part of it based on a new price each year. You and your co-owner would generally own 100% of the property upfront, but would simply pay the purchase price over multiple years. 

If you can determine a price between you and the landlord, you may not need real estate agents. Because real estate commissions are paid by the seller, this could save the landlord 5% or more of the transaction price, depending upon where you live. You could agree to split the difference to determine a fair value, and reduce it by a notional 5%. That price could be based on a valuation from a real estate appraiser or by mutual agreement.

If you chose to work with an appraiser, you may want to each get an appraisal and then use the midpoint between the two as the selling price, as an example. Your landlord may leave money on the table, especially given the hot real estate market, by not listing the property and selling to the highest bidder. He could potentially list the property and give you the first right of refusal to match the best offer. 

So, while there could be an opportunity for you to help your landlord reduce his capital gains tax, it may not save him a lot of tax, depending on his other typical sources of income. There are other things for all parties to consider related to co-ownership and valuation. Hopefully, you can all come to an agreement where everybody wins.

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.



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