I listened to the audiobook The Miracle Morning written by Hal Elroy. It was nothing that I didn’t hear before, but it serves as a great reminder for me to continue my early morning commitment.
Recently I have been slacking a bit with my early morning wake up. Instead of 4:30am, I now wake up mostly between 5am to 5:30am.
Between my wake time and my kids’ wake time, I only manage to get a few things done. It still adds instrumental value to my day though. I want to share with you what I do every morning before the kids get up to get my morning started –
First thing I do is to brush my teeth. Who wants to go through the morning with bad breath? Not only that but who wants to risk tooth decay and cavities? I always make sure to attend my dentist appointments to ensure that my oral health is in check. Your local dentist – like Dentist fairfax – should be able to tell you the areas of your dental health routine to focus on as well as see if there are any procedures they recommend you have.
I go downstairs, drink a glass of water, meditate for 12 minutes.
For those of you who don’t know what meditation is, google it. You will notice that almost all successful people meditate. It’s an exercise that you focus on your breath. You ignore the thoughts that come and go and simply focus on the breath. This gives you a sense of calm and train your mind to focus (it’s hard to focus with so many apps and social media everywhere).
I personally find that I am less cranky after I meditate. I am able to put my phone away most of the time when I am with my kids.
I do my 5 minute journal. I write down 3 things I am grateful for, read my affirmations and write down what would make today great. I talk about 5 minute journal in my previous blog post here.
I review my goals and look at my vision board.
I plan my day, cook and eat breakfast and start working.
I’ve been following this routine since January. I finished my book during this time, hired a new assistant, passed through most of the tax season without much help and still managed to go to the gym regularly (2x a week).
I am also able to enjoy some family time with my kids.
I was doing Miracle Morning before I even heard of the book itself.
I am not perfect either, but this morning routine allows me to get more done in shorter periods of time. Check it out if you can’t find enough time for everything you want to get done. ?
Now onto this week’s topic –
I attended the Rock Star VIP member event last night regarding asset protection and taxes. One member asked a question – can I add my kids’ to the title of my property to minimize tax?
There’s a saying that says, “there’re only two things certain in life: death and taxes.”
That’s true. You can learn more about death and taxes in this previous blog post I’ve written.
Why would you add your kid’s name to the property title?
To try to save on probate tax, which is roughly equivalent to 1.5% on the value of the property, many people would “add their kids’ names” onto the title of their properties.
You might find it easier, if you are having to deal with probate, with getting yourself someone like this new york probate attorney as they can help you with all the legal things.
Probate tax can be avoided if you have a named beneficiary. It can also be avoided if the assets are jointly owned and it is passed to the joint partner by right of survivorship.
To avoid probate, many people would add their kids to the title of their bank account and their primary residence.
Kids are now part owner of the property. What is the tax impact?
Income tax impact when you add your kid by right of survivorship
At the time when you add your kid’s name to the title, you are deemed to dispose a portion of your primary residence at fair market value.
If you add one kid to the title by right of survivorship, this pretty much means you are giving away half of the property to your kids.
The disposition is deemed to be at fair market value in the eyes of Income Tax Act.
There’s no income tax impact at the time this happens.
If the kid resides at the property as well, there’s no tax impact upon sale of the property. Both you and your kid can claim primary residence exemption on the property upon sale and shelter all the capital gain.
If the kid does not reside in the property, he would have deemed to acquire the property at fair market value.
When you decide to sell your property eventually, your portion of the gain is again not subject to tax, assuming you continue to live there until sale.
But your kid will be responsible for capital gain tax on his 50% ownership. Yikes!
With this arrangement, you can avoid the 1.5% probate, but you lost out on the capital gain tax that could have been easily avoided since you continue to live in the property.
What if you simply add your kid’s name and assign 1% ownership to him?
This type of ownership is considered joint tenant.
Your kid will not automatically get the house when you pass away.
He still owns 1% when you die.
Your share, namely the 99%, will be distributed based on your will. It can all still go to your kid as you initially intended.
Upon death, there’s no capital gain tax on your 99% share, assuming you reside in your property from the beginning.
But your estate is responsible for the probate of 1.5%.
What if it is a rental property?
Rental property is a different ball game. It is an investment property. If you do truly add your kid on title by right of survivorship, you are deemed to have disposed the asset at fair market value.
This also means that you will be liable to pay the capital gain tax at the time when you add your kid’s name on title.
If you purchase a property for $300K, it is worth $500K when you add your kid’s name on title. You are deemed to dispose 50% of the property.
Capital gain = ($500K – $300K) x 50% = $100K
Taxable capital gain is 50% = $100K x 50% = $50K
If your marginal tax rate at the time is 54%, you will be liable for $27K.
Your kid is now required to report ongoing income & expenses from the rental property for his 50% ownership.
At time of death, you will still have a deemed disposition for the 50% you still own.
You can avoid probate of 1.5% but you can’t avoid taxes at death.
If you only give 1% ownership of the rental property to your kid, your kid will only need to report 1% of the income. Your deemed disposition at the time of the transfer is minimal (1% of $100K).
You continue to keep the ownership and reports the income & expense until death.
Deemed disposition still applies upon death. Your estate would still be responsible for the tax liability on deemed disposition.
AND, you cannot avoid probate.
But sometimes it is not as black and white
Many people simply add their kid’s names on title without specifying the type of ownership – right of survivorship (no probate) or joint tenants (probate).
How would the Tax Man know whether you are subject to probate or not?
Our government recently clarifies this for us. If the true beneficial ownership did not change, you cannot avoid probate.
One way to show true beneficial ownership is the tax reporting.
If you continue to report 100% of income and expenses from the rental property, then chances are, you cannot avoid probate since the change of ownership never happens.
If you report 50% deemed disposition and your son starts to report 50% of the income & expenses from the rental property, it is good evidence that you can avoid probate.
Morale of the story, the Tax Man is always there to get his share. Make sure you consult a tax professional before “simply adding your kids’ names to the account”.
Until next time, happy Canadian Real Estate Investing.
Cherry Chan, CPA, CA
Your Real Estate Accountant