How would YOU pay for down payment on a house? - Canada

[Jimbo]

Curious to hear the thoughts of the community on this situation.

We are planning to buy a house before we sell the condo we own. We can swing the two mortgages for a while (obviously not ideal). We do this because the condo is so full (we have 2 kids) we think it will not show well, and also because actually purchasing a house is tricky and we do not know when it will happen.

But! Let's say it happens short term. We are in Canada. We have enough in either TFSA, RRSP or taxable account to pay for the down payment (yay mustachianism!).

Which account should we use? I think it should be the TFSA (we can reimburse them when we sell the condo) to avoid taxes.

Am I missing something?

Thanks.

[Jouer]

Not exactly what you are asking but I have a question for you. Are you in one of those hot market cities? I did the opposite move as you - house to condo because we moved to a H(er)COL city.

Both our selling and purchasing markets are so hot that everything sells in a week. Listings come out on Tuesday, everything decent sells that week, new listings come out the next week. And so on. So we sold in one week and bought the next. It was stressful as all hell....but it ended up being totally fine. In your case I would buy first and sell second so you know what closing date you want when you sell.

[Jimbo]

Not exactly what you are asking but I have a question for you. Are you in one of those hot market cities? I did the opposite move as you - house to condo because we moved to a H(er)COL city.

Both our selling and purchasing markets are so hot that everything sells in a week. Listings come out on Tuesday, everything decent sells that week, new listings come out the next week. And so on. So we sold in one week and bought the next. It was stressful as all hell....but it ended up being totally fine. In your case I would buy first and sell second so you know what closing date you want when you sell.

I guess everything is hot these days, so I would answer yes...  Because of that (and we don't want to partake in bidding wars), we don't know exactly when we will buy. So that is also why we plan to buy first then sell. Would rather have 2 mortgages than 0 house. :-/

[Goldielocks]

Paying for two mortgages is EXPENSIVE.   and unpredictable.

I recommend finding the house you want, putting in a normal contingent offer (on the sale of your condo).

Sell your condo while living in it.  This may mean going to an AirBNB for a week to clean, paint, and open house your condo.  Set a bit lower price on it.  You will save $$ over moving twice (if you rent in between) and/or carrying two mortgages.

Repeat a second time.  (Max)

Get an agent who is great at getting advance notice out there that it is coming up for sale, doing the photos / video / etc early.

[SunnyDays]

As for your question about which account to use first, I would use the taxable account first and then if you have to withdraw more money, then the TFSA (because it’s still after tax money and you can only replace that money the following year).  I would not touch the RRSP.  At all.

[Jimbo]

As for your question about which account to use first, I would use the taxable account first and then if you have to withdraw more money, then the TFSA (because it’s still after tax money and you can only replace that money the following year).  I would not touch the RRSP.  At all.

Thanks for that! Good point about having to wait for the next year to top up the TFSA. Although the end of the year is fast approaching already. Wouldn't the tax hit on selling (capital gains) in the taxable account be greater than this hassle though? The RRSP was not really an option considered.

For the worried replies, yes we are preapproved, yes we can swing it, yes it is expensive and a hassle. Worse comes to worse we can rent out the condo for some cash flow... not the preferred option, but an option. Although I would rather sell and own less real estate.

Thanks!

[rocketpj]

I'm assuming you can't use the RRSP for a HBP withdrawal because you probably did that with the first property.  If you can, then do that - no penalty withdrawal, 18 years to repay it.

Otherwise make it your taxable account.  Given the market of the past year you may be able to write off some portion of losses when you withdraw funds (depending on what your accounts are structured like).

I'd agree with other posters that you should do a vigorous purge of belongings in the house (discard, sell, donate, storage in that order).  Then go with offers subject to the sale of your property.  Take a week to paint, clean and finally fix that baseboard or whatever.

A pain, but much less than moving with kids multiple times.

[Jimbo]

Hi everyone, thanks for the replies, but I must confess, I am super confused by them! 100% not what I was expecting...

Just to clarify on the RRSP, this is true, we can't use the HBP, but likely wouldn't have even if we could, because we want to get that RRSP pot as it currently is to grow untaxed. So removing money from it is not ideal - removing future growth. For early retirement, this should be touched as a last resort, no?

Then I see a lot of recommendations on using the taxable account. Why would we use the taxable account? I don't get it. This will mean taxes galore on capital gains. I might have some harvestable losses (which would then offset some capital gains) but they are small. And I can keep them for later. I would want to keep the taxable account for when I have a lower taxable income (again, early retirement) to minimize taxes.

The TFSA seems like a slam dunk, and I was expecting some agreement on this. I am not seeing it, so I am confused. We can withdraw the money, capture profits/capital gains untaxed, increase our TFSA ceiling, and fill it back up on January 1st, 2021 once the property is sold. I see zero downside.

Am I missing something or simply going mad?

Thanks!

[dclarke1]

Hi everyone, thanks for the replies, but I must confess, I am super confused by them! 100% not what I was expecting...

Just to clarify on the RRSP, this is true, we can't use the HBP, but likely wouldn't have even if we could, because we want to get that RRSP pot as it currently is to grow untaxed. So removing money from it is not ideal - removing future growth. For early retirement, this should be touched as a last resort, no?

Then I see a lot of recommendations on using the taxable account. Why would we use the taxable account? I don't get it. This will mean taxes galore on capital gains. I might have some harvestable losses (which would then offset some capital gains) but they are small. And I can keep them for later. I would want to keep the taxable account for when I have a lower taxable income (again, early retirement) to minimize taxes.

The TFSA seems like a slam dunk, and I was expecting some agreement on this. I am not seeing it, so I am confused. We can withdraw the money, capture profits/capital gains untaxed, increase our TFSA ceiling, and fill it back up on January 1st, 2021 once the property is sold. I see zero downside.

Am I missing something or simply going mad?

Thanks!

I don't consider myself an expert on taxes, but that would be my preference - to use the TFSA. My understanding is that RRSP withdrawals, not under HBP or LLLP would be taxed as income. Withdrawing for a down payment could generate a hefty income tax bill. There's no tax consideration on the TFSA withdrawal and the contribution room continues to grow and the entire amount becomes available for you the next January.

[Goldielocks]

Hi everyone, thanks for the replies, but I must confess, I am super confused by them! 100% not what I was expecting...

Just to clarify on the RRSP, this is true, we can't use the HBP, but likely wouldn't have even if we could, because we want to get that RRSP pot as it currently is to grow untaxed. So removing money from it is not ideal - removing future growth. For early retirement, this should be touched as a last resort, no?

Then I see a lot of recommendations on using the taxable account. Why would we use the taxable account? I don't get it. This will mean taxes galore on capital gains. I might have some harvestable losses (which would then offset some capital gains) but they are small. And I can keep them for later. I would want to keep the taxable account for when I have a lower taxable income (again, early retirement) to minimize taxes.

The TFSA seems like a slam dunk, and I was expecting some agreement on this. I am not seeing it, so I am confused. We can withdraw the money, capture profits/capital gains untaxed, increase our TFSA ceiling, and fill it back up on January 1st, 2021 once the property is sold. I see zero downside.

Am I missing something or simply going mad?

Thanks!

You want your TFSA to stay fully invested for tax free growth, as long as you can.

1.  Pull from taxable accounts up to the point where your capital gains would trigger you into a higher tax bracket.  Capital gains are only taxed 50%.  Combined with harvest-able losses, this should be quite a large amount before you are pushed into higher tax brackets.

Note - also consider your future tax brackets, are you moderate income now, and likely to get into higher income later in life?  If so, your retirement tax bracket could also be higher than today.

2.  Then take from your TFSA the remainder.

3.  When you have the $$ back, add to your taxable account, now with a higher cost basis so you pay less taxes in the future.

ETA -- on the face of it, your strategy sounds great, except that carrying two places is RISKY and EXPENSIVE.   You may not have the money to put back into your TFSA next year, and you will be out of the market there for 6 months.

If you had a guaranteed sale, and just had a long possession date in the future, so you had to wait for the $$'s, then I would be more likely to support the TFSA route.

[Jimbo]

Thanks for these additional points. Good ideas raised. I like it.

I will try to get as much out of the Taxable as possible, then use TFSA to cover the balance.