Hi,
I'm a newbie to real estate investment. In fact, I haven't even invested yet. My wife and I are looking at potential rental income properties in BC lower mainland, and I am creating/adapting an Excel cashflow model to compare them. I've studied the T4036 guide and T776 form, and can't seem to find any guidance on how to divide the land and building amount of a purchase price, since only the building is eligible for CCA depreciation.

It is clear that CCA can have a significant aftertax cashflow effect, but there seems to be little guidance on how to estimate building value . For houses, I think maybe the Assessed value (e.g. at EvalueBC) is the place to start, as it breaks out buildings and land. However even there, with the prices of homes being way above assessed value, the question would be whether to use the percentage of purchase price, or to fix the $ value of the house (Most conservative)

So if you buy a place for $300K with an assessed value of $200K, and a building value of $75K (37.5%), do you fix the starting balance at $75K, or at $112.5K (37.5% of $300K purch price). What about a townhouse or condo, with no assessed building value?

The lady at CRA told me it's up to the owner to estimate a value, and if CRA wants to audit, they'll come and ask you what estimating method you used. That would make it very advantageous to choose 50% of purchase price and hope they accept it, downside being you'll pay the tax difference if they ask you to, but no more than you would have paid if you estimated more conservatively!

Thanks in advance for any insight anyone can give to this long-winded post!
Gary
Delta, BC

Use a reasonable estimate. Many cities break out land from house. Some don't though. I a big city land could be 60-95% of purchase price whereas in small cities it might be 25% or less.

You can also order an appraisal but in most cases a fact based estimate is good enough.

If it is a detached / semi-detached home using a vacant lot value from surrounding properties would be fairly reasonable as well. Typically, rental buildings are purchased in more built-out area so you will end up buying where there is already strong rental demand and nearby commercial amenities. It is quite possible some of the housing stock is nearing the end of its useful life. Try filtering vacant land on MLS and use a SF proxy.

If you have read the tax regulations, you have seen that depreciation needs to be recaptured at time of sale. It is not necessary a home run to depreciate. From Financial Post:


Depreciation can create confusion when it comes exit strategy.

Matt Crowley said:

.. depreciation needs to be recaptured at time of sale. It is not necessary a home run to depreciate. ...

Click to expand...

It is essentially a tax deferral strategy.

As such, depreciate to get taxable income to 0 then stop, annually. This may take ten years and then you have to pay taxes even after maximum annual 4% depreciation. Time to refi then and add more tax deductible debt, or increase management fees (depending on ownership structure and/or JV agreement, of course).