Tax Question - Can RE Loss be Used to Reduce Tax Paid as an Employee?

[Nir]

Hello,

A question from a JV partner:

Is it correct you can NOT use losses, shown on your RE Rentals Statement, to reduce your employment income? meaning you can not pay less tax then you would otherwise - as an employee without the rental business? (assuming RE is are under your name of course, not corporation).

His accountant mentioned that to him which I find a bit surprising because, if I recall correctly, a long discussion HERE on this forum concluded the opposite(?)

THANKS.

 

[kir]

Maybe the accountant is referring to the use of CCA or depreciation to compound further loss, which can`t be used to reduce your total income.
So if rental expenses exceeds rental income, you have a loss...but you can`t further this loss by more depreciation.

Just a thought.

Kir.

 

[Nir]

ok to clarify the question: let`s assume you have a rental loss of 10,000 (rent - expenses=-10,000). your employment income is 100K.
will you get tax back or not? in other words will the rental loss reduce the total tax you have to pay compared to just having 100K employment income?
Thanks.

 

[kir]

IN that case, the total taxable income will be reduced from 100K to 90K and there will be a refund (~ $300-400 bucks).


Kir.

 

[Nir]

QUOTE (kir @ Apr 14 2010, 04:59 PM) IN that case, the total taxable income will be reduced from 100K to 90K and there will be a refund (~ $300-400 bucks).


Kir.

you meant ~ $3000-$4000, not 300-400. Thanks Kir.

 

[Thomas Beyer]

QUOTE (investmart @ Apr 3 2010, 05:01 PM) ..

Is it correct you can NOT use losses, shown on your RE Rentals Statement, to reduce your employment income?..
Yes, you can use those losses but only without the CCA (aka depreciation).

Thus, if rent is $20,000/year and expenses are $22,000 then $2000 can be used to offset other income.

If however the rent is $20,000/year and expenses are $16,000 for a $4000 income, minus depreciation of 4% on a $250,000 asset or $10,000, i.e. a loss of -$6000 then the $-6000 canNOT be used to offset other income !

Keep in mind that usually there should be no loss in a positive cash flow asset, unless it is a year with heavy upgrade expenses.

Also, mortgage payment consists of interest payments (deductable) and principal payments (not deductable).

On sale of an asset with a loss, you canNOT use the capital loss either against income, only against capital gains (on your stocks perhaps).

 

[jeffjas]

QUOTE (ThomasBeyer @ Apr 18 2010, 07:14 PM) If however the rent is $20,000/year and expenses are $16,000 for a $4000 income, minus depreciation of 4% on a $250,000 asset or $10,000, i.e. a loss of -$6000 then the $-6000 canNOT be used to offset other income, in fact you have to pay taxes on $4000 !


On sale of an asset with a loss, you canNOT use the capital loss either against income, only against capital gains (on your stocks perhaps).


Thomas, in your example you would not have to pay tax if you claimed CCA, you would just claim the amount of CCA that reduces your rental income to $0 but no more. In other words you cannot create a loss using CCA.

You are also not correct about the sale of an asset class that appears on your income taxes CCA schedule. You can actually claim a loss on the sale of an asset (including property) against your income, this is called a Terminal Loss and is completely different from a capital loss. It all depends on the asset class and what the UCC in that asset class is, but its certainly doable.

 

[Thomas Beyer]

QUOTE (jeffjas @ Apr 18 2010, 06:51 PM) Thomas, in your example you would not have to pay tax if you claimed CCA, you would just claim the amount of CCA that reduces your rental income to $0 but no more. In other words you cannot create a loss using CCA.

You are also not correct about the sale of an asset class that appears on your income taxes CCA schedule. You can actually claim a loss on the sale of an asset (including property) against your income, this is called a Terminal Loss and is completely different from a capital loss. It all depends on the asset class and what the UCC in that asset class is, but its certainly doable.
indeed re the $4000 .. I wrote in haste ..

Enlighten us on terminal loss please .. as I was advised by my accountant that a loss on sale of stocks or real estate canNOT be used against employment income but only against capital gains !!!

 

[jeffjas]

QUOTE (ThomasBeyer @ Apr 18 2010, 09:01 PM) indeed re the $4000 .. I wrote in haste ..

Enlighten us on terminal loss please .. as I was advised by my accountant that a loss on sale of stocks or real estate canNOT be used against employment income but only against capital gains !!!
Here are the main asset classes for real estate

Class 1 4% Buildings acquired after 1987
Class 3 5% Buildings acquired before 1987

Bought Building Year 1 ....$500,000 (Class 1)
Claimed CCA Year 1.........$(10,000) (1/2 year rule)
UCC End of Year 1..........$490,000

Sell Building Year 2..........$480,000

Terminal Loss Claimed
Against Rent Income........$ 10,000 (490,000 (UCC) - $480,000 (Proceeds)

It just simply goes against your business/rental income which effectively reduces tax payable.

Thats why I`m not a huge advocate of claiming CCA every year. If there was a sudden downturn in the real estate market or if you came upon a huge deficiency with the property and you had to sell your income producing property and you didn`t claim very much CCA you could potentially claim the loss on sale against your income, perhaps giving you a bit more of a refund to soften the portfolio hit

Here is a link on a recently upheld Tax Court decision on allowing a Terminal Loss on the sale of buildings for a Limited Partnership, but the rules are the same for an individual.

http://www.cpd.cica.ca/incometax_GAAR-terminalloss.pdf

In the early to mid 90`s, during the real estate slump, people who were selling their homes, for whatever reason, started "renting" their basements or entire house for 6 months and then claimed huge terminal losses the following tax year creating an artificial tax refund. Revenue Canada at the time, disallowed the terminal losses not because it was on real estate but because there was no evidence of an actual rental business / operation.

I dont know if the rules are different for the ventures you are involved with but my explanation was in regards to the general and more common rental business operation. Definitely speak to your accountant or better yet find out why he doesn`t know this.

I thankfully haven`t had to calculate this amount during my short real estate career and I don`t plan to.

 

[DonCampbell]

Lots of tax questions this time of the year. So we`ll be hosting a LIVE discussion on the Globe & Mail web-site on Monday the 26th at noon eastern (9am pacific).

Here is the link (where you can set a reminder) Tax Discussion Live on Globe & Mail or http://bit.ly/dfbMuV

Submit your questions at the site. It is hosted by The Globe so they will be choosing the questions.

CYA there

Don R. Campbell