Selling a home after buying another.

[Swank]

The time has come for me to get a new home as the new job is way across the city. My current home is paid off, so what I'd like to do is buy a new place, move into it, fix the 'old' one up and then sell it. I don't want to live in a renovation and I have no interest in renting the 'old' one out, I don't want to be a landlord.

I plan to go with an open mortgage with a 1 year term so I can put the money from the sale of the old home down on it once it sells, then when it's time for renewal close it in for 5 year terms and go from there. When I do this, can the monthly payments be reduced accordingly given the massive reduction in the principal? Is there a smarter way to do this? The new home wouldn't cost a lot more, so it would be nice to be mortgage free again in ~5-10 years.

I understand that my old home will be a secondary residence while I still own it but live in the new one and if it goes up in value there would be capital gain tax implications there, or am I way off base? How is this rate determined? Appraisal when it becomes secondary and then pay capital gains on the difference when sold?

I know these questions are likely best suited for a mortgage expert and accountant, but it would be also good to get some direction from someone who has been through this before.

[blitz]

If it's just a 1 year term then you should be able to put the proceeds of the sale into the new house before renewing and have whatever payments you want (based on term).

Just a note that I believe you can't pull homeowner permits from the city (electrical, plumbing, etc) if it's not your primary residence.

[you&me]

I know this isn't what you asked for, but have you considered using the proceeds from the sale of your current (first) home for other investments?

I know the idea of being mortgage free is nice, but with the mortgage interest rates where they are, I'd be finding a more productive place for my cash. Just a thought...

[max_boost]

Other investments like what?

[Swank]

Originally posted by you&me
I know this isn't what you asked for, but have you considered using the proceeds from the sale of your current (first) home for other investments?

I know the idea of being mortgage free is nice, but with the mortgage interest rates where they are, I'd be finding a more productive place for my cash. Just a thought...
You're right, in fact after speaking with my financial adviser last night she said that would be a much better move. Obviously the key is to make sure I pay down enough to keep the payments manageable and then use the rest to work for me.


Originally posted by blitz
Just a note that I believe you can't pull homeowner permits from the city (electrical, plumbing, etc) if it's not your primary residence.
The fixing up I plan to do is mostly cosmetic, but good point to consider should I decide to do serious renovations that would require permits.

[Sugarphreak]

...

[TimLacroix]

Sent PM... :)

[Strider]

Originally posted by you&me
I know this isn't what you asked for, but have you considered using the proceeds from the sale of your current (first) home for other investments?

I know the idea of being mortgage free is nice, but with the mortgage interest rates where they are, I'd be finding a more productive place for my cash. Just a thought...

If other investment is an objective, then wouldn't putting the proceeds into the new house and taking out a HELOC as a tax-deductible investment loan (ie Smith Maneouvre) be more tax efficient?
(of course this depends on a large number of factors, including OPs mortgage rate, tax bracket, sheltered vs unsheltered investments)

[avishal26]

Originally posted by Strider


If other investment is an objective, then wouldn't putting the proceeds into the new house and taking out a HELOC as a tax-deductible investment loan (ie Smith Maneouvre) be more tax efficient?
(of course this depends on a large number of factors, including OPs mortgage rate, tax bracket, sheltered vs unsheltered investments)

I don't think so - I believe when you use the Smith Maneuver, only your interest paid towards your HELOC is tax-deductible.... but you're still paying interest.

If you simply use the cash to put into the same investment as you would with the above scenario, you would have the same capital gains (non-taxable if you are in a registered plan which you have to be in for Smiths' maneuver to work) and would not be paying interest at all.. This is my opinion.

This link explains it pretty well.

http://www.theglobeandmail.com/globe-investor/personal-finance/mortgages/the-smith-maneuver-a-canadian-mortgage-tax-deductible-plan/article12059456/

[Strider]

Originally posted by avishal26
I don't think so - I believe when you use the Smith Maneuver, only your interest paid towards your HELOC is tax-deductible.... but you're still paying interest.

If you simply use the cash to put into the same investment as you would with the above scenario, you would have the same capital gains (non-taxable if you are in a registered plan which you have to be in for Smiths' maneuver to work) and would not be paying interest at all.. This is my opinion.

This link explains it pretty well.

http://www.theglobeandmail.com/globe-investor/personal-finance/mortgages/the-smith-maneuver-a-canadian-mortgage-tax-deductible-plan/article12059456/

You've got it a bit backwards, the Smith Manoeuvre is only useful on taxable (non-registered) investments.

The idea is that say OP has $300k in equity from current home, and is upgrading to a $500k home. He can:
a) Put $100k downpayment, mortgage $400k, invest $200k
b) Put $300k downpayment, mortgage $200k, draw a $200k HELOC for investment

In scenario a) OP pays interest on $400k worth of mortgage (none of which is deductible).

In scenario b) OP pays interest on $200k worth of mortgage (non-deductible), and $200k worth of HELOC (on which he can deduct the interest expense against the income generated from his investments).

[Swank]

Thanks for the info guys (and the PM Tim!), I think I'll be carrying a larger mortgage than I first thought and offset it a lot with investment income. Just had my offer on a slick little place in Lakeview accepted so it's time to put my plan into motion!

[darthVWader]

Would the value of the old house go way up after some lipstick? Would you make more then you're going to put in?

If it was me I would just sell it as is and let the new owner do what they want.

[sputnik]

Paint is worth $50 in the can.... $1000 on the walls.