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I have a convoluted situation regarding valuation of multiple residences for purposes of Equalization settlement. The values below are fictitious and used for example purposes only (the real value of the homes are significantly more). I use the term "matrimonial" home below to indicate the home we originally both lived in prior to our separation. Please bear with me with the background below:
2005- Married and living in our matrimonial home for 20+ years.
2005 - We purchased my Ex's family home from his ailing father who had to move to an extended care home and wanted to keep the house in the family - we did not have the funds to purchase it outright at the time. We drew up an agreement to "purchase" the home within the next 5 years at a price of $100K. We assumed all expenses related to the home (taxes, utilities, insurance, etc.) and paid his father interest at market rate for the agreed to purchase price until we could formally purchase the home. The home was old and required extensive maintenance but was in a very desirable neighbourhood. Our intent was to eventually renovate and move in there to downsize from our existing home.
2005-2007 - To help defray the cost of maintaining the new home, we rented the home out for a period of 2 years (remember we still did not officially own the home) and claimed this income on our individual taxes.
2007 After the tenants left, we decided to do a complete renovation of the new home - both inside and out. This cost us 100K. The renovations also took 2 years to do as my Ex was doing all the work himself (let's not go there). Between 2007 - 2010 our marriage deteriorated significantly.
2010 - In early 2010 I requested a separation and we mutually agreed that I would live in the new home during our "trial separation". We also had the original agreement to purchase the home extended to give us time to deal with the financing. We agreed that I would pay for all the costs related to the new home (utilities, taxes, insurance, etc.) and my Ex would do the same with the matrimonial "old" home. Essentially we were living in two separate residences and each paying our costs of living in those two residences. The only thing that was shared was the cost of the Line of Credit - these costs were split 50/50. The LOC was secured against the Matrimonial home but funds used to finance the renovations of the new home.
2011 - We officially purchased the new home using a LOC against the old home and title transferred to us jointly. At this point the new home cost is $200K ( the purchase price plus the renovation costs). I continue to live in the home as my residence until we settle our separation/divorce.
2012 - I have been living in the new home for over 2 years. We have been dealing with mediators and lawyers trying to get a separation agreement in place ever since I confirmed my desire to make the separation permanent in late 2010. The main issue is the home and their value and who is going to get what - the key stumbling block being my Ex wants both houses and my position is that I want one of the houses - he can choose which. We have the new home appraised and it comes in at 300K. The matrimonial home's value is estimated at 200K. Much money is being spent on lawyers meantime without getting anywhere mostly due to my Ex's unwillingness to budge.
2012 - We have a breakthrough - my Ex relinquishes his position of taking both homes, has decided he will take the new home (and I get the old home) AND, informs me his intent is to rent the new home and he has tenants lined up for a 4 year lease at a very attractive monthly rent! They needed to move in within 2 months! This was a high pressure situation as the tenants wanted to sign the tenancy agreement immediately or would go with another home. I agreed, despite not having a formal agreement in place (and against the advice of my lawyer) because (a) I felt my Ex finally had the impetus to get a final agreement in place so he could reap the nice rental income (b) my Ex agreed he would vacate the matrimonial home within the next few months ( he needed time to ready his cottage so he could move there ) so I could then move in to our matrimonial home, (c) my Ex agreed he would work to finalize a formal agreement , including purchase and sale of both properties, within the next month after the lease was signed. This was all agreed to over a very stressful back and forth over email. I also felt safe in that the rental agreement had to be drawn up and signed in both our names as we were joint owners of the property, so if things did not proceed as planned, I was entitled to half the rental income. This agreement would require me to find a temporary place to live for a couple of months, which I did by renting a duplex month to mont, so I could move out in time for the tenants to take possession.
2015 - fast forward to today. My Ex never did vacate the matrimonial home, we still do not have a separation agreement, I have been paying rent for over 2 years waiting for this to all be settled. We are finally in "serious" negotiations on the basis of the agreement we had originally arrived at in 2012 prior to the tenants moving in. He takes the new home, I get the matrimonial home.
HERE is my question - my Ex is claiming that , when we "exchange" properties (ie technically I am "selling" him my portion of the new home and he is "selling" me his portion of the old home) the new home will be subject to capital gains. Furthermore, he states that he will have to pay the capital gains taxes equivalent to 1/2 of the difference between current market less purchase/renovation costs (300-200) ie 50% of 100K or 50K. He states he will be required to pay this and therefore is including this amount in the equalization formula essentially reducing the amount of equalization he pays me by that amount (he is taking the more valuable home, therefore will owe me equalization).
My position is that there is no capital gains owing by him or me as (a) he is not selling his stake in the property, I am, and (b) it was my principle residence at the time I agreed to sell him my portion, therefore should be no capital gains involved. There is the complication that we have been earning rent on it since 2012 (splitting it even though my Ex tried to say it was his based on "our agreement"). But at the time of the agreement to sell it to him, it was my principal residence and it was appraised at 300K, not 200K. Furthermore, should Capital Gains be applicable , I think it would be on the value at the time of the rental agreement came into place where the value of the home was already set at 300K and the current market, which has not changed much since that time.
Can anybody provide insight into how this exchange of property would be handled from a tax / equalization settlement perspective? Any help or advice on how to proceed would be much appreciated. I know it is confusing to us and our lawyers can't seem to get their act together or agree on it either.
2005- Married and living in our matrimonial home for 20+ years.
2005 - We purchased my Ex's family home from his ailing father who had to move to an extended care home and wanted to keep the house in the family - we did not have the funds to purchase it outright at the time. We drew up an agreement to "purchase" the home within the next 5 years at a price of $100K. We assumed all expenses related to the home (taxes, utilities, insurance, etc.) and paid his father interest at market rate for the agreed to purchase price until we could formally purchase the home. The home was old and required extensive maintenance but was in a very desirable neighbourhood. Our intent was to eventually renovate and move in there to downsize from our existing home.
2005-2007 - To help defray the cost of maintaining the new home, we rented the home out for a period of 2 years (remember we still did not officially own the home) and claimed this income on our individual taxes.
2007 After the tenants left, we decided to do a complete renovation of the new home - both inside and out. This cost us 100K. The renovations also took 2 years to do as my Ex was doing all the work himself (let's not go there). Between 2007 - 2010 our marriage deteriorated significantly.
2010 - In early 2010 I requested a separation and we mutually agreed that I would live in the new home during our "trial separation". We also had the original agreement to purchase the home extended to give us time to deal with the financing. We agreed that I would pay for all the costs related to the new home (utilities, taxes, insurance, etc.) and my Ex would do the same with the matrimonial "old" home. Essentially we were living in two separate residences and each paying our costs of living in those two residences. The only thing that was shared was the cost of the Line of Credit - these costs were split 50/50. The LOC was secured against the Matrimonial home but funds used to finance the renovations of the new home.
2011 - We officially purchased the new home using a LOC against the old home and title transferred to us jointly. At this point the new home cost is $200K ( the purchase price plus the renovation costs). I continue to live in the home as my residence until we settle our separation/divorce.
2012 - I have been living in the new home for over 2 years. We have been dealing with mediators and lawyers trying to get a separation agreement in place ever since I confirmed my desire to make the separation permanent in late 2010. The main issue is the home and their value and who is going to get what - the key stumbling block being my Ex wants both houses and my position is that I want one of the houses - he can choose which. We have the new home appraised and it comes in at 300K. The matrimonial home's value is estimated at 200K. Much money is being spent on lawyers meantime without getting anywhere mostly due to my Ex's unwillingness to budge.
2012 - We have a breakthrough - my Ex relinquishes his position of taking both homes, has decided he will take the new home (and I get the old home) AND, informs me his intent is to rent the new home and he has tenants lined up for a 4 year lease at a very attractive monthly rent! They needed to move in within 2 months! This was a high pressure situation as the tenants wanted to sign the tenancy agreement immediately or would go with another home. I agreed, despite not having a formal agreement in place (and against the advice of my lawyer) because (a) I felt my Ex finally had the impetus to get a final agreement in place so he could reap the nice rental income (b) my Ex agreed he would vacate the matrimonial home within the next few months ( he needed time to ready his cottage so he could move there ) so I could then move in to our matrimonial home, (c) my Ex agreed he would work to finalize a formal agreement , including purchase and sale of both properties, within the next month after the lease was signed. This was all agreed to over a very stressful back and forth over email. I also felt safe in that the rental agreement had to be drawn up and signed in both our names as we were joint owners of the property, so if things did not proceed as planned, I was entitled to half the rental income. This agreement would require me to find a temporary place to live for a couple of months, which I did by renting a duplex month to mont, so I could move out in time for the tenants to take possession.
2015 - fast forward to today. My Ex never did vacate the matrimonial home, we still do not have a separation agreement, I have been paying rent for over 2 years waiting for this to all be settled. We are finally in "serious" negotiations on the basis of the agreement we had originally arrived at in 2012 prior to the tenants moving in. He takes the new home, I get the matrimonial home.
HERE is my question - my Ex is claiming that , when we "exchange" properties (ie technically I am "selling" him my portion of the new home and he is "selling" me his portion of the old home) the new home will be subject to capital gains. Furthermore, he states that he will have to pay the capital gains taxes equivalent to 1/2 of the difference between current market less purchase/renovation costs (300-200) ie 50% of 100K or 50K. He states he will be required to pay this and therefore is including this amount in the equalization formula essentially reducing the amount of equalization he pays me by that amount (he is taking the more valuable home, therefore will owe me equalization).
My position is that there is no capital gains owing by him or me as (a) he is not selling his stake in the property, I am, and (b) it was my principle residence at the time I agreed to sell him my portion, therefore should be no capital gains involved. There is the complication that we have been earning rent on it since 2012 (splitting it even though my Ex tried to say it was his based on "our agreement"). But at the time of the agreement to sell it to him, it was my principal residence and it was appraised at 300K, not 200K. Furthermore, should Capital Gains be applicable , I think it would be on the value at the time of the rental agreement came into place where the value of the home was already set at 300K and the current market, which has not changed much since that time.
Can anybody provide insight into how this exchange of property would be handled from a tax / equalization settlement perspective? Any help or advice on how to proceed would be much appreciated. I know it is confusing to us and our lawyers can't seem to get their act together or agree on it either.
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