How to sell 50% of my rental property?

[Thomas Lorini]

Greetings BP family, I was wondering if anyone has ever sold half a rental property? I know it sounds strange but hear me out...instead of selling a property or refinancing to pull out equity I have a good friend of mine interesting in giving me money for half or ownership in one of my rentals. The idea is he gives me cash and we draft a contract between us. That's it. The only thing is determining how much? So I'm looking for some advise in this type of a scenario: Purchase price (2 yes ago): $130,000 Downpayment 20%: $26,000 Current Value: $180,000 Mortgage pay down: $10,000 If I sold today I would pocket approx: $60,000 (minus closing costs and re commissions) He's offering 180,000 x 20% = $36,000 For 50% stake. What are your thoughts? Is there a better way to calculate 50% of the value? Thanks for helping me out, Thomas

[Roy N.]

@Thomas Lorini

Here in Canada your plan will be seen, by the CRA, as a {contract for} sale and, once executed, you will incur any applicable CCA recapture and capital gains taxes on the portion of the property you sell.  Your friend would/should then go on title and you would be either joint tenants or {more probably} tenants in common. 

Your lender may accelerate your mortgage or may vet your new partner and simple require him to sign onto the mortgage as a guarantor {the first scenario is more probable}.

If you are looking for equity you could simply take a second mortgage from your friend, provided your primary lender will allow it and you conform to any restrictions (i.e. all mortgages must collectively be less than 80% LTA) dictated by your existing mortgage agreement.   The second mortgage would naturally be registered against title to protect the interests of your friend.

If your friend extended you an interest-only second for 5-years (or however long until your primary mortgage term expires).  you could then sell him the entire property in the future (when the primary mortgage rolls over) to both satisfy the payout of both mortgages and then put any remaining cash in your pocket.

Alternatively, if you have retired the primary mortgage, you could sell the property to your friend, extinguishing the principal balance of the second mortgage (as the down payment perhaps) and providing a vendor carry on the remainder (earning you a little more interest income and allowing you to defer your capital gains over a period of up to 5-years).

You still will not avoid taxes, but with a little planning {see your accountant} you can stay on-side and mitigate the taxes due.