“I Inherited a Condo, Should I Rent or Sell it?”

27th August, 2018

On August 2nd, Mark Ting discussed the advice he gave to a brother and sister who couldn’t decide what to do with a condo they recently inherited.  Below are the highlights of his CBC “On the Coast” interview with host Gloria Macarenko.

When beneficiaries of an inheritance ask for your advice, what is the most common question?

Most people ask if they are going to be taxed on the inheritance. I’m happy to say the answer is “no.” The estate of the deceased is responsible for any taxes owning, so once the inheritance is distributed to the beneficiaries, it is in “after tax” dollars.

In this case, the brother and sister received a clear title apartment worth about $500,000.  The brother wanted to keep it and rent it out but his sister wasn’t so sure.  They figured it would rent for about $1,800/month, which is mostly “take-home” money as the property was mortgage-free.

An extra $1,800 a month sounds pretty good, did you recommend that they rent out the property?

No, I thought it wasn’t a good idea because the siblings had very different attitudes towards money and had different financial goals.  The brother had some personal debt, a mortgage and was contemplating retirement.  His sister was mortgage free, already retired and living off a generous government pension. She also made it clear that she likes to keep her finances uncomplicated.

Neither of them had any experience being a landlord and I just didn’t think they should start now. Also, I didn’t like the math on the unit.  After property tax, strata/condo fees and maintenance, the unit would only bring in about $16,500/year.  On a $500,000 investment, the rate of return would only be about 3.3% and then you would pay tax on that income.

Because of the low after-tax returns combined with all the hassles of being a landlord, renting out the condo isn’t worth it.   I would rather the sister spends or invests her portion of the inheritance and I would recommend that her brother pay off his debts.

As a rule, when receiving an inheritance should people prioritize paying down their debt?

Not necessarily.  For single people,  paying down debt is typically my first suggestion, but it is a little more complicated with a married couple.  After receiving an inheritance, most people go straight to the bank to deposit the cheque or use the funds to pay off the mortgage on the family home.  However, that’s not always a good idea, particularly if the marriage is on shaky grounds.  If a marriage is rocky, my advice would be to keep the inheritance money separate from your day-to-day banking account and hold off paying down the mortgage.

Can you talk a little bit more about that, why wouldn’t someone want to pay down their mortgage?

If you think you might get divorced, it could cost you.  Let’s look at two scenarios. Scenario #1, I inherit $200,000 and use the money to pay off the $200,000 mortgage on my home worth $1M.  A while later, things take a turn for the worse and my spouse and I separate.  Our assets are split 50-50 which means I would receive $500,000 of the $1M house.

Scenario #2 I inherit $200,000 but do not pay off the mortgage and instead simply deposit the cash in my own bank account.  A short time later, we get divorced and the family assets are split.  The $1M house which still has the $200K mortgage is sold leaving $800,000 for my now ex-spouse and I to split.  My share is $400,000.   However, the $200,000 which I received as an inheritance, all that money is mine to keep.

Inheritances no longer need to be shared after a marriage breakdown. In other words, if you receive an inheritance it is yours even if the marriage ends in divorce. There is a caveat, you can’t “co-mingle” or combine the inheritance with other family assets. The most common ways people co-mingle their inheritance is by paying off a mortgage or putting the cash in a joint bank account, thereby mixing it with your family’s day-to-day spending money.

But what if you wanted to pay down the mortgage or spend the money on your family, is that such a bad thing?

Absolutely not, it is your money to do with as you wish. If you want to pay down debt, invest it, give it away, or shower your spouse with presents– that’s all fine.   If you feel your marriage is solid and the family can benefit from the using the cash, then go for it.

However, if there is a decent chance of a divorce and then you receive the inheritance, you could end up losing half of it if your marriage breaks down. It’s a costly mistake, a mistake that can be easily avoided with a little planning.

Thanks for reading Mark Ting @MarkTingCFP
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