Help! I’m Rich. I’m Rich in Equity.

Help! I’m Rich. I’m Rich in Equity.

Help? What for? Many Canadians are equity-rich by default of owning a home, but don’t know if they should unlock the cash they have earned by selling. If you have owned a home for longer than 18 months you’ve probably seen a decent increase in your net worth. And if you’ve owned a home for 10 years or longer, well, by some measure, you’re sitting on a small Klondike gold mine.

So what does this actually mean? Housing prices have gone up over 100 per cent* since 2012 and, in some areas, even higher. You may be very happy to know that. Well here is the icing for your cake. Assuming it’s your principal residence—the home you declare to CRA that you spend most of your time in—then upon the sale, it’s tax free… for now! I’ll come back to this.

Let’s say you’ve owned your home for five years. You bought it for $1m and it’s worth $1.5m today. That $500,000 gain is actually the equivalent to $713,118. Here’s the theory: Assuming a 53.53 marginalized tax rate, if you had to go and get a job and earn $500,000 you would be left with somewhere in the ballpark of $267,882, after paying taxes, for a NET difference of $445,236.**

Source: Toronto Real Estate Board

So why might you need help? Well, the equity is great from a net worth standpoint, but if equity erodes because of a higher interest rate environment and falling housing prices, you may stand to lose.

Many people find themselves in a position where they are equity-rich. What to do to lock in the cash equivalent begs the question of whether to sell and put some cash in their pocket, diversify into equities, or stay in real estate using a passive investment vehicle like a REIT.

For many people, the idea of simplifying life financially feels like a breath of fresh air. Many people are moving to smaller homes, in tertiary markets where housing prices are lower, or even to the cottage. Every homeowner has different requirements.

For those that have seen a nice uptick in their net worth, many are taking cash off the table, selling now and liquidating their gains.

Capital gains taxes have long been debated in parliament. The US has already moved towards a tax on the capital gains of a home sale. Canada currently does not. Somehow we are going to have to pay for our country’s debts and one of the “easiest” ways to do so is to tax the gain over our long coveted principal residence.

So should you sell now and lock in your gains? I guess that answer is up to you. Here are a few questions that may help with the decision:

  1. Do I think housing prices will go higher in the near-to-mid-term with the rising cost to borrow?
  2. Is taking some cash off the table a prudent decision in your investment time horizon?
  3. Does the thought of paying down debt or other financial obligations with the rise of interest rates sound appealing?
  4. Does your home still meet your needs?

Feel free to reach out to our team of real estate professionals. We may not have all your answers but sometimes just talking things through can help in your decision making.

*varies by area

**Approx. Turbotax calculator