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With a three-year-old child, good jobs and a promising future, Tanya and Edward are looking for a financial road map.
In June, Tanya started working again after spending years studying and then caring for their baby. They both turn 35 this year.
“We're wrestling with a number of questions,” Edward says in an e-mail. “How can we afford to buy a home? Can we afford to have another child? Our rental property has appreciated; can we take advantage of that? Should we be borrowing to catch up our RRSPs? What does a reasonable monthly budget look like?”
Tanya, an engineer, earns $65,000 a year and has gone back to school in the evenings to take a second master's degree.
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Edward, who brings in $120,000 a year in a management job, bought a loft condominium in downtown Toronto before he was transferred to Montreal. He intended to live in it but never got the chance, so it's rented out.
Now that they're back in Toronto, he and his wife deem the loft too small and its open plan unsuitable for raising a family. So they'd like to buy a house within biking distance of Tanya's workplace. They figure it would cost about $600,000.
They'd like to keep their income property, too.
What Our Expert Says
We asked Warren MacKenzie, president and chief executive officer of Second Opinion Investor Services Inc., to take a look at Edward and Tanya's situation.
Tanya and Edward are contributing to their pension plans and their registered retirement savings plans, paying down their mortgage and planning to work part-time when they retire. Since they're already taking the important steps, they need only continue doing what they're doing, enjoy their working years, and let retirement take care of itself, Mr. MacKenzie says.
They already own a rental property, which carries itself from a cash flow point of view but produces no extra income, and in which they have about $160,000 of equity. But they want to buy a larger home, better suited to raising a family.
“There is more to life than retirement, so if a larger home is needed to make family life better, and if they can afford to buy it, they should do so,” Mr. MacKenzie says.
If they do buy a home to raise their family, can they keep their rental property or should they sell it?
There are pros and cons to both approaches, but on balance, it would be prudent to sell the rental property, Mr. MacKenzie says, because the advantages of selling far outweigh the disadvantages.
The disadvantages of selling are twofold: Selling will trigger capital gains taxes of about $30,000, and if real estate soars in value, then having more real estate will mean a greater increase in net worth.
The advantages of selling the rental property are many: Edward and Tanya will lock in the capital appreciation that has occurred. They can use the money to pay down $20,000 of non-deductible student loans. Selling eliminates the hassle and risk of finding and dealing with tenants and it will allow them to make a larger down payment on their new home. They can use some of the proceeds to use up $23,500 of RRSP room, which will partly offset the capital gains tax they will pay.
