Tax issues for having investor pay negative cash-flow

[Millions]

I have a condo in Killarney.

Not including repairs, it is negative cash-flow about $350-$400.

Because I dont make much money and still have school and such, I was considering having someone else pay the difference.
I have 2 scenarios.

My parents: they are on title with me. They always have to pay taxes at years end because of pensions. It could help them as a write-off but they dont make much either being retired.

My brother: Makes a lot of money ($100K) but does not own anything. no investments, house, etc.. and has a high tax bracket.
My thoughts were for him to pay the $350. Write it off and then I can pay him back 80% of what he has paid when I sell. Gives him a nice little return.

Wanted to know of either is possible. Idea would be for the "investor" to have a write-off and also get paid back most of the investment in the end making it 10% return or so.

Any thoughts on this?

Matt

 

[Mecheng]

Not sure if someone paid the $350 that it could be used a tax "write-off" like you suggest.
The CRA does not care if you property is positive or negative cash flow as defined by you.

Gross rent (-) CRA approved expenses will provide your net income or loss.
If this is a positive number it is added to your personal taxable income if a negative number it is subtracted.
It is likely you will have a negative number due to your cash flow situation but not necessarily the case and it`s not necessarily $350.

Only when you know this true net loss can you determine the actual tax deduction this property will deliver.
I suggest you understand this value before making any deals with people and getting them in trouble with CRA.
Note, using a property as a tax deduction can backfire if at any point the net loss turns into a net income.
Also not sure you can change the tax percentage of ownership once determine, although I can`t confirm that.

I`m not an accountant so please consult one and do your own due diligence on this matter.

You don`t mention if this negative cash flow is monthly or yearly, either way you may want to look at some other options.
Anyway to decrease expenses or increase rents?
Is selling an option? Appreciation and mortgage pay down are great but negative cash flow is a headache that eats away at you final ROI. What are your expectations for a return on this property? Can your money be working harder for you somewhere else?

 

[Nicola]

Is it negative cash flow to you or to the CRA? For example, you may be out of pocket $350, but if you count mortgage interest only (not prinicipal and interest, as principal isn`t deductible), you may not actually have a net loss.

 

[Rickson9]

Do you hate your family?

 

[Millions]

QUOTE (Rickson9 @ May 10 2010, 09:07 PM) Do you hate your family?

Why would you ask this?

I have been using this as a write-off for myself and thought he could use and still get paid back from myself

 

[Thomas Beyer]

QUOTE (Millions @ May 10 2010, 02:08 PM) ..

Wanted to know of either is possible. Idea would be for the "investor" to have a write-off and also get paid back most of the investment in the end making it 10% return or so.

...
In order to qualify for a "write-off" as you call it you have to be an owner, co-owner or a limited partner.

2 options:
a) you sell a portion, say 50% of the property to someone, for real consideration. This person gets 50% of any gains or losses.

b) you open a limited partnership. This is a legal structure we use a lot, but it is slightly more complex than a JV or a corporation. Details see here: What is an LP ? You are the general partner, and someone (or 12 others) else becomes the limited partner(s). Then you can allocated losses 100% to the limited partners and 50% of the gains, or whatever you agree on. The GP gets a fee and equity, as per the LP agreement. Could be $1/year or $12,000/year .. whatever you agree on. The cost of opening an LP and the associated LP agreement are about $3000 to $5000 depending on lawyer.

The benefit of option 2 is that the losses are "lopsided" .. but it comes at a higher cost !

Research both option, then propose one to your investors.

Money reflecting true market value has to change hands in either scenario .. but you can achieve the stated goal of allowing you and an investor to make money while allocating some or all of the losses to the investor, depending on the legal structure !

 

[Millions]

QUOTE (Mecheng @ May 10 2010, 07:59 PM) Not sure if someone paid the $350 that it could be used a tax "write-off" like you suggest.
The CRA does not care if you property is positive or negative cash flow as defined by you.

Gross rent (-) CRA approved expenses will provide your net income or loss.
If this is a positive number it is added to your personal taxable income if a negative number it is subtracted.
It is likely you will have a negative number due to your cash flow situation but not necessarily the case and it`s not necessarily $350.

Only when you know this true net loss can you determine the actual tax deduction this property will deliver.
I suggest you understand this value before making any deals with people and getting them in trouble with CRA.
Note, using a property as a tax deduction can backfire if at any point the net loss turns into a net income.
Also not sure you can change the tax percentage of ownership once determine, although I can`t confirm that.

I`m not an accountant so please consult one and do your own due diligence on this matter.

You don`t mention if this negative cash flow is monthly or yearly, either way you may want to look at some other options.
Anyway to decrease expenses or increase rents?
Is selling an option? Appreciation and mortgage pay down are great but negative cash flow is a headache that eats away at you final ROI. What are your expectations for a return on this property? Can your money be working harder for you somewhere else?


Hey and thanks for the response. The neg cash flow is monthly. I have chased the payments down as far as they can go now sitting at $1500 including condo fees. With condo rent, it has dropped to about $1250, so a loss of $250.

I would love to sell but as I bought in 2007, I think my only choice is have someone assume my mortgage for free or just hold on to it. I am trying to offer it as an assumption for just $10K. OR even a lease-to-own but the issue with that is I need to get a new tenant in there for June so it kind of messes that option up for a little while.

My only benefit to Killarney is the C-train station in 1-2 years which will be 3 blocks away. Maybe then I could sell or maybe condo will drop futher in value with all the new ones opening up....

Decisions, decisions...

Matt