Life and love affairs are no longer linear as they were 70 years ago, with marriage, buying the house and having children. Very often, a person buys a property alone. Then, love strikes and the desire to live together emerges. But what to do with the residence?
Gabriel* bought a duplex in Montreal in 2016. His boyfriend, Étienne*, lives in an apartment and, in July, he will move into the building. The couple will then begin work to transform the duplex into a single-family home. “We would like to become co-owners, but since I have invested a lot of money in the building in the past few years and it has increased in value, we are not sure how to go about making it fair,” says Gabriel.
The situation of Gabriel and Etienne is common, it may even seem trivial, but it involves several legal, fiscal and financial notions. “It is common for two people with different salary differences and different down payments to want to buy a property and there is not a recipe for everyone to follow”, indicates from the outset Nathalie B. Poisson, notary, Wealth Management at Professionals’ Financial.
She emphasizes that you always have to analyze the situation on a case-by-case basis and choose the solution that satisfies both people.
One of the important elements in their case is the fact that they are not yet de facto spouses. To become one, they must have lived together for a year and indicate this in their tax return. As one of the apartments in the building was rented, Gabriel will be taxed on the capital gain of this apartment since the time of purchase, in 2016. But he will not be taxed on the space he lives in, since he will benefit from the tax exemption for the principal residence.
“But if the two are de facto spouses, Gabriel will be able to roll over to his spouse, which means that the tax payable on the rental portion will be deferred until the eventual sale of the building,” explains Me Poisson, who advises the couple to meet with their tax accountant before making the transaction to fully understand the tax impact.
In addition, Etienne will not have any real estate transfer tax (“welcome tax”) to pay if they are common-law spouses.
Gabriel’s gross weekly salary: $2350
Etienne’s gross weekly salary: $1850
The couple will then have to look at what Gabriel has invested in the building since its acquisition in 2016 and what it is worth today. “There are different ways to proceed and the couple must consult a notary specialized in this type of question who can offer them different scenarios,” says Nathalie B. Poisson. But normally, the ideal is to have the property seen by a certified appraiser. Thus, both will have its market value. »
Then, to calculate Etienne’s debt, you will have to take into account the fair market value of the building, the mortgage balance, the purchase price, the improvements made, as well as the amortization on the rental portion since ‘acquisition. “We will have to do a calculation of what it is worth in today’s dollars,” says Mr. Poisson. Then, from this amount, the share of the building that Etienne will buy will be calculated as well as, if applicable, the percentage that this sum will increase in value each year. »
The couple can then decide whether Étienne will repay his debt to Gabriel now, depending on his ability to pay, or only when the building is sold.
They will of course have to enter the details of who pays what in a cohabitation contract or an indivision agreement. “Then each time Etienne repays an amount of his debt, it is recommended that Gabriel give him a receipt, preferably by notarial deed”, specifies Me Poisson.
Etienne will then have to take the time to assess his ability to pay to determine if he can afford to buy 50% of Gabriel’s property, or a lower percentage.
To determine his ability to pay, Etienne will therefore have to look at the various charges related to the building, such as the mortgage, taxes, maintenance costs, the amount that will be invested in the renovations, the amounts that he is committed to reimbursing his spouse if necessary, etc.
“Next, Etienne must look at his income, his other debts, his retirement savings and his various financial commitments to determine what part of the building he can buy,” explains the notary.
Both spouses should also think about drafting documents that will protect them in the event of a major problem. Of course, it is advisable to provide in the cohabitation contract what would happen in the event of a breakup.
“Normally, it is recorded that a spouse cannot sell his share before having offered it to the other,” says the notary.
In addition, since they are not married, they must think about what they will do in the event of the death of one of the two. “If they want their share of the building to go to the other, they must include in the cohabitation contract a clause of sale subject to the condition precedent of death, which means that the heirs of the deceased spouse will not have the choice to sell his half of the property to the remaining spouse,” says Nathalie B. Poisson.
Each spouse can also decide to bequeath his share to his spouse in the event of death, but for this, each must register it in his will.
The notary also advises thinking about making a protection mandate in case of incapacity. “For example, if a spouse is in a coma, his money, even what is in his joint account, will be frozen, specifies the notary. The other spouse will need a protection mandate to be able to access their income to pay the costs related to the property. »
Finally, it is good to think about life and disability insurance. “For example, if, in the event of the death of one of the spouses, the one who remains needs to buy the share of the other from his in-laws, he will have to have cash, explains Nathalie B. Poisson. Then you have to think about what will happen in the event of disability. Insurance can be used to protect both spouses from these types of situations and allow them to rest easy. »
Planning a project that requires wise use of your money? Do you have financial problems?