Tax Advantages of Owning Real Estate

With April arriving at the end of this week, tax season is officially upon us. I know most of you view taxes as a dry subject that isn’t particularly exciting. That being said, there is one element of the subject that always gets people excited - paying less taxes!

There are many tax advantages to owning and investing in real estate. Although we aren’t accountants, and would defer any specific question regarding your tax situation to a professional, there are a few broad tax advantages that you should all be aware of.

So without further ado:

1. Capital gains on a principal residence are tax free. So say your one of those lucky Vancouver home owners who bought their house 30 years ago for $100,000 and are now selling it for $3,500,000, those proceeds are your tax free. There are some complications if you also own a vacation home and are unsure which property is your “principal residence”. You may also have a hard time with CRA if you are a contractor and buy and sell your principle residence for profit multiple times. Talk with your accountant about some of these scenarios.
2. Financing costs related to an income property are tax deductible. The general rule is, if you're borrowing money to invest to make income, the interest costs with that borrowed money are tax deductible. For example, if you buy a duplex for rental income, and get a mortgage at 3% interest, and you are in a 40% tax bracket, your after tax cost of borrowing becomes only 1.8% ((3%*(1-0.4)). This makes your return on cash invested potentially very attractive.
3. Depreciation can be claimed as an expense against rental income. You are able to depreciate the value of the property every year (usually up to 4% of the value of the building), which will lower your taxable rental income in that year. So for example, if you had a property with $10,000 of taxable income, and property with a book value of $200,000, you could claim a depreciation expense of $8000 ($200,000*4%), lowering your taxable income to $2,000 for that year. This basically acts as a tax deferral, which can come in very handy in tax planning. Also note, that claiming this depreciation lowers your book value and will increase your capital gain down the line when you sell. This can be a complicated subject and should be discussed with your accountant.
4. Properties can be owned in personal names or owned in holding corporations. Different ownership structures can provide different opportunities for tax planning and flexibility. Owning in a corporation can also have legal liability advantages. Again another subject to discuss with your accountant.

While this is far from an exhaustive list, these are some of the tax advantages related to real estate you should be aware of this tax season.

Are there any tax benefits you enjoy from your real estate ownership?

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Russel Lalovich
russel@lalovichrealestate.com
Office: (519) 966-0444
Cell: (519) 995-5620