Category Archives: Real Estate

Tax Advantages for Rental Properties

By: GenXinvestor

In this article I discuss the tax advantages for rental properties.  Whether you live in Canada, the United States, Great Britain or Australia, many countries possess similar tax advantages when it comes to rental properties.  Before getting into that let’s briefly recap why rental properties can be a great investment for some people.

tax advantages for rental propertiesWhy Own Rental Property?

For centuries, owning real estate has been one of the best ways to build wealth.  In fact, one of the richest men in history, John D. Rockefeller once observed that “the major fortunes in America have been made in land.”

Owning rental property has many obvious advantages.   Foremost among them are earning extra monthly cash-flow and building equity in a tangible asset.  I bought my rental property for precisely those reasons.  But one of the least understood aspects to owning rental properties are the various tax advantages associated with that type of investment.

Tax Advantages for Rental Properties

Here are some of the big tax advantages for rental properties:

Mortgage Interest deduction.  If you own a rental property, then chances are you also have a mortgage.  After all, a big reason to invest in a rental property has to do with using leverage to maximize the return on investment (ROI).  It’s important to remember that only the amount that goes towards the mortgage interest can be deducted, not the portion that goes towards the principal.

Property taxes can be deducted.

Insurance costs can be deducted.

Land Transfer taxes cannot be deducted in the same way as property taxes can.  Instead, they are added to the purchase price and will factor into the depreciation of the building.

Utilities.  If a landlord pays for utilities, then they can be deducted.

Professional Fees.  If you use an accountant or a property manager, then the fees can be deducted.

Advertising.  The amount spent on advertising the rental property can be deducted.

Vehicle.  In certain cases a person may be able to deduct vehicle expenses.  For example, if a person uses his vehicle to bring building materials and tools to perform work on a property, then it can be deducted.  For two or more properties a person could claim vehicle expenses for the collection of rent.   If someone wants to write-off a portion of their vehicle I suggest reading the CRA’s rules for claiming vehicle expenses.

All current and capital expenses can be deducted.  Basically, the difference between a current expense and a capital expense has to do with whether or not the expense restored the property to its original condition or if it improved the property.

Here’s an example of each.  A current expense, such as fixing a broken toilet can be deducted in the same year as the expense occurred.  A capital expense, such as upgrading kitchen countertops to granite from laminate must be depreciated over time because the property was improved.  See here how the Canada Revenue Agency (CRA) defines current and capital expense.

Some other examples of current expenses include:

Painting.  Painting can be deducted as a current expense because it is part of the general maintenance of a house.

Other Repairs.  Fixing a hole in a wall or a broken step or a cracked tile.  All of these are examples of current expenses that can be deducted.

Grounds Maintenance Fees.  If you hire a property manager or contract out the grounds keep for your rental property then the costs can be deducted as a current expense.

In contrast to current expenses, it’s important to remember that capital expenses are depreciated over time.

Depreciation.  The building (but not the land) can be depreciated so it’s important to know what percentage of the purchase price is allocated to the building and what percentage will belong to the land.  Most residential units are classified as Class 1 and can be depreciated by 4% per year.

Appliances can also be depreciated.  They fall under Class 8 and can be depreciated by 20% per year.

For more information about the classes of depreciable property see the CRA’s webpage here.

While rental properties offer lots of deductions, the biggest thing that cannot be deducted is your own labour.  So if you want the write-off, then hire out the maintenance on your rental property.

After all expenses are added up, there will either be a profit or a loss.

When there’s a profit, it gets added to the taxpayers other income and is taxed at their marginal rate.

A loss however, can be deducted from other sources of income, such as a person’s employment income, which reduces the overall tax bill.

Although there are many tax advantages for rental properties, they can be quite complicated so I would recommend hiring a certified professional accountant (CPA) to look after your tax situation.

For more detailed information about taxes and rental properties check out the Canada Revenue Agency’s webpage here.

If you’ve enjoyed this article check out my other investing articles:

The Joy of Being A Dividend Investor

Investing in Rental Property

How To Become A Millionaire

Photo Credit: Photo by Stuart Miles / FreeDigitalPhotos.net

Investing in Rental Property

By: GenXinvestor

investing in rental propertyIn this post, I look at investing in rental property.  With daily warnings on Canada’s red-hot real estate market, it may come as a surprise to some of you that I’ve taken the plunge and purchased my first investment property: a duplex.

Despite frothiness in the housing market, there are still deals and opportunities to be found for those who do their homework.  In keeping with my plan to create as much passive income as possible, I hired a competent property manager to run my rental property.  This, of course, cuts into my profit but saves me lots of time, which in turn allows me to search out my next investment deal.

My rental property investment was not the result of some impulsive desire to invest in something, or some naive HGTV inspired move because “houses are always great investments.”  No.  This purchase was the result of about a month of intense research into rental properties, taxes, realtors, property markets, property managers, and countless hours spent running numbers.  That’s the kind of intense, up-front work that needs to be done to create a passive or semi-passive stream of investment income.

I can’t stress enough to anyone who is considering an investment in a rental property to do your research first…before buying, and consider every conceivable scenario and how you would react to them all.  If you plan for the worst-case scenario, then you have your downside risk covered.  Never buy property without having the full picture of what you’re getting into.

So now that I bought a rental property does this mean that my financial strategy and investing approach has changed?  Well, not really.  I think this investment property will integrate seamlessly with my other investments and will add several hundred dollars to my monthly passive income.  I don’t plan on selling any of my financial assets to acquire the property and I will continue to save and invest my money in high quality dividend-paying companies and low-cost index funds.

My plan has always been to achieve financial freedom by buying diversified income producing assets like stocks, bonds, index funds, REITs and, yes, even rental properties.  I feel like, after having built up hundreds of thousands of dollars in financial, paper assets, now is a good time to add a rental property to my investment mix.

There’s lots of reasons why I made the move on investing in rental property but the main reason is Leverage to acquire an income producing asset!  I typically invest money into financial assets from my personal savings which has taken a big hit this year with our new home, renovations and a new baby.  Unfortunately, we used our HELOC to fund the renovation work so I can’t draw on those funds as normally would to “borrow to invest.”  While I still pay myself first, any extra funds are going to pay off the HELOC so I can draw on it once again to buy some great dividend paying stocks.

Saving and investing is a tried and true long term strategy for achieving financial independence. But I’ve added a rental property into the mix as part of my overall long term investment strategy in the hopes that it will help accelerate my plan to retire early and be financially free.

I have almost 300k in financial assets that pay around 8k/year in passive investment income.  With the right rental property, I can get 5k or more each year in rental income plus a few grand in equity for a lot less invested thanks to the power of leverage.

Leverage is simply borrowed money and while it can lead to huge upside, it can also backfire and result in huge losses.  It is OPM (other people’s money) and when people buy real estate it is almost always financed in this way through a mortgage.

So basically, money is tight this year and I’m trying to get the most bang for my buck.  By investing in rental property, I can borrow money to buy an income producing asset where tenants pay the mortgage and I get a little bit of extra cash flow.  There’s also lots of tax benefits to owning investment property but that is a topic for another post altogether.

If you’re interested in buying a rental property and becoming a landlord then I highly recommend picking up a copy of Douglas Gray’s The Canadian Landlord’s Guide

If you like this article you may want to read my other investing articles:

How To Build Passive Income Streams

Investing in Rare Coins

Investing in Physical Gold

The Joy of Being a Dividend Investor

Index Investing

Photo Credit: Photo by Stuart Miles / FreeDigitalPhotos.net