Evaluating Renovations

[MikeMcC874]

I have a property that needs a lot of work. I didn`t realize just how much when I bought it but I am making progress and will end up OK over the long run.

However, my initial reno budget got eaten quickly and a leaking drain pipe on the 3rd floor has eaten into the slack.

The first thing I did was get an eco-audit before they canceled the federal program and have till March 2011 to get my exit audit. I now need to rationalize by spending to optimized that rebate.

I have 2 older furnaces and can get them replaced for about $8000.

With the eco rebate and a rebate from OPA I would get $2000 back for doing it. Bringing my cost down to $6000.

Now I have had a good year at work and will be in the top tax bracket. Lets say 50% when all is said and done.

Because of all the other reno`s the rental will not show a profit this year even before CCA. I am pretty sure I can justify all of the repairs as repairs and not capital improvements.

As a result, I am viewing this reno as costing me $3000 after I get my tax return and my rebate cheque. Its really just a cash flow issue to pay for it.

Is this the correct way of looking at this?

On top of that I am thinking that 2 new energy efficient furnaces will not only save on gas every month but increase the value of the property by at least $3000.

Please discuss and correct my perspective if I am off.

Mike

 

[hotbunz4]

It sounds like you just bought this place and are fixing it up before renting.
If this is the case, it is my understanding that all repairs "in order to get the place ready for rent"
would be considered capital costs to CRA.
If you had previous tenants and need to do some repairs to get it back to snuff it
might be a different story ...new furnaces would be capital cost either way though.

 

[GarthChapman]

I concur with Hotbunz. The furnace costs are almost double what they would be for mid-efficiency. Compare efficiency ratings and there aren`t that far off, although in new construction they are mandated now. Mid efficiency furnaces cost around $2,200 for a Maytag with 10-year parts and labour warranty. Tough to beat!

 

[MikeMcC874]

QUOTE (hotbunz4 @ Jul 17 2010, 08:07 PM) It sounds like you just bought this place and are fixing it up before renting.
If this is the case, it is my understanding that all repairs "in order to get the place ready for rent"
would be considered capital costs to CRA.
If you had previous tenants and need to do some repairs to get it back to snuff it
might be a different story ...new furnaces would be capital cost either way though.

The property has been fully rented the entire time I have been fixing it up. There was a lot of deferred maintenance.
New windows, new roof and adding a water softener so I could convert to a tankless water heater.

So, even though the furnaces are replacing units at the end of their life, it is considered capital cost?

Mike

 

[invst4profit]

New windows, tankless, new furnace... you aren`t by any chance including utilities in the rent are you?

In the case of rental properties it is not, in my opinion, a good idea to justify expenses by trying to convince yourself it will increase the value of a property. Normally, unless you are planning on selling right away, improvements such as new furnaces do not add significantly to resale as people expect to have a reliable furnace although it may make a property easier to sell. Ten years down the road when you are looking to sell they simply are no longer significant as a selling point.

Also spending more money to make money in rebates on rentals is not always financially responsible. Mid efficiency is a far better investment as the pay back on high efficiency is too long term to warrant the additional cost and if tenants pay there own utilities there is zero pay back. Try convincing a tenant to pay higher rent because there is a high efficiency furnace.

Having researched the initial cost to payback on high efficiency I will chose mid efficiency for my personal home as well. This based on how long I plan on staying here, the price to buy and install and the fact that the savings in fuel cost compared to mid efficiency has a pay back period that is far to long to consider as a financial factor when upgrading from what I presently have which is a 25 year old gas furnace.
If you have to finance the purchase the decision is even easier.

 

[housingrental]

I`m not sure your area / whats still going on but I recently had two new hi efficiency furnaces installed in a property and the net costs after rebates was a bit under $2000 each (apx $1800 I think)

 

[MikeMcC874]

QUOTE (housingrental @ Jul 18 2010, 12:19 PM) I`m not sure your area / whats still going on but I recently had two new hi efficiency furnaces installed in a property and the net costs after rebates was a bit under $2000 each (apx $1800 I think)

My unit is in Woodstock. Not far from you.

Can you share who you used and some details on the model of furnaces you used?

Thanks
Mike

 

[housingrental]

Sure send me an email I`ll send you contact points. Woodstock is likely doable
I`d have to check model of furnaces at property but they were hi-eff

 

[Thomas Beyer]

QUOTE (MikeMcC874 @ Jul 17 2010, 02:49 PM) ..

Because of all the other reno`s the rental will not show a profit this year even before CCA. I am pretty sure I can justify all of the repairs as repairs and not capital improvements.

...

Is this the correct way of looking at this?

..
expense what was replaced, i.e. if you replace an old boiler with a new one, or an old roof with a new one: THAT IS AN EXPENSE.

If you add s.th., say a new veranda or a 3rd bathroom that was not there before, then it is a CAPITAL EXPENSE.

Some folks at CRA and some accountants may argue that you have to capitalize an expense, say over 10 years as the roof or boiler life is certainly more than a year, but if you are essentially just bringing the house back to life, it is an expense.

some issues are grey, say an energy efficient boiler vs. a standard boiler, or a new metal roof vs. and old shingled roof ..

have a look at these CRA guidelines, page 11: http://www.cra-arc.gc.ca/E/pub/tg/t4036/t4036-09e.pdf

 

[MikeMcC874]

QUOTE (ThomasBeyer @ Jul 19 2010, 01:34 PM) expense what was replaced, i.e. if you replace an old boiler with a new one, or an old roof with a new one: THAT IS AN EXPENSE.

If you add s.th., say a new veranda or a 3rd bathroom that was not there before, then it is a CAPITAL EXPENSE.

Some folks at CRA and some accountants may argue that you have to capitalize an expense, say over 10 years as the roof or boiler life is certainly more than a year, but if you are essentially just bringing the house back to life, it is an expense.

some issues are grey, say an energy efficient boiler vs. a standard boiler, or a new metal roof vs. and old shingled roof ..

have a look at these CRA guidelines, page 11: http://www.cra-arc.gc.ca/E/pub/tg/t4036/t4036-09e.pdf

Thanks Thomas, I read that but the problem I am having is that it still seems to be very open to interpretation.

1) I replaced 28 windows because there were in such bad shape that some were literally plexiglass pains glued together. Capital or expense.

2) I replaced the replaced both the flat and shingle portions of the roof because we had a leak in part of it. Capital or expense.

3) Added a water softener because it was required by DE for a tankless system I was adding to replace 3 tanks that were there. Replaced all visible galvanized piping with Pex while I was at it. Capitial or expense.

Mike

 

[MikeMcC874]

QUOTE (housingrental @ Jul 19 2010, 01:06 PM) Sure send me an email I`ll send you contact points. Woodstock is likely doable
I`d have to check model of furnaces at property but they were hi-eff

Thanks Adam, I will.

 

[Thomas Beyer]

QUOTE (MikeMcC874 @ Jul 19 2010, 04:29 PM) Thanks Thomas, I read that but the problem I am having is that it still seems to be very open to interpretation.

1) I replaced 28 windows because there were in such bad shape that some were literally plexiglass pains glued together. Capital or expense.

2) I replaced the replaced both the flat and shingle portions of the roof because we had a leak in part of it. Capital or expense.

3) Added a water softener because it was required by DE for a tankless system I was adding to replace 3 tanks that were there. Replaced all visible galvanized piping with Pex while I was at it. Capitial or expense.
an opinion .. not a CRA approved guideline:

windows are an expense (as there were windows before) .. if you had added 3 new windows those would be capital i.e. an improvement

roof is an expense (as you just replaced it)

water softener is new, thus capital

pipes replaced old one: expense

be prepared for a CRA audit, and they might argue: it is all an improvement, thus expense over 10 years .. but an expense to me is to replace what was there before with s.th. new .. (of course new is always an improvement, thus nothing should be an expense then !!)

 

[hotbunz4]

QUOTE (ThomasBeyer @ Jul 19 2010, 08:19 PM) of course new is always an improvement, thus nothing should be an expense then !!)


Yeah, That`s what CRA may want you to think.

Unfortunately, everything in the tax code is confusing, open to interpretation, or thicker then my phone book (not to mention a dryer read).

"Do this, but be ready for an audit" ...it`s a sad world we live in when advice like this has to be given.

...I better stop this rant before I say anything objectionable or attract the attention of the CRA.
They intimidate me for the above reason and I can only assume it`s on purpose.

Kev