Taxes with Investment Properties: Pros vs Cons

[BeemerBen]

I was curious to see anyones input who has gone through the whole Buy, Rent, Sell process in terms of the benefits of renting investment properties in respect to taxes.
What kind of benefits does one achieve when it comes to doing taxes (pertaining to investment properties of course)?

Yes, I know that interest is a write off, but what other kinds of tips in terms of tax write off`s do you guys have to offer?

On the flipside, what are the drawbacks of renting out your investment property tax wise (In respect to personal residences)?

Are there any notable differences or benefits, tax wise, to which province you reside in?

Also, in terms of DO`s and DON`T, what kind of advice would you give to a first time investor?

What were your biggest mistakes and successes when first getting into real estate investments?

And finally, slightly off topic; what piece of literature, relevant to Canadian real estate, would you recommend for a first time investor?

Thanks in advance to any input. Your time is greatly appreciated.

 

[navaz]

Your primary purpose of investing has to be- to make money in the long term. To make an investment decision based on tax poses various problems -such as losing it all!

It might be a good idea to read Don Campbell`s "investing in real estate in Canada"- as it will answer the questions that you pose

 

[Thomas Beyer]

buying real estate WITHOUT RENTING is like buying a car and not driving it ..

buying real estate for pure capital appreciation is called speculation .. and yes that does work in some markets if your timing is impeccable .. but usually does not work in the long term .. where in Canada RIGHT NOW would you buy for profit without renting .. how and why ?

Prepare to pay taxes .. because it means: you sold for a profit !

read ALL THE BOOKS ON REAL ESTATE .. there are many: by Raymond Aaron, by David Lindahl, by Ozzie Jurrock, by Robert Allan, by various other experts .. and by Don Campbell .. and maybe mine one day if I ever get to writing it ..

 

[BeemerBen]

Sorry, perhaps i phrased my questions wrong. I was not referring the tax benefits without renting. What I was asking was, what can be claimed (aside from interest) on investment properties? I have read many books pertaining to the real estate investment market, however, I am just starting the Don Campbell book and was curious to the tax `write-offs` releative to the canadian market. So let me rephrase exactly what I meant when I blurted out the jargon stated above.
In respect to primary residents (personal residence) and investment properties (properties that will undoubtedly be rented) what are the pros and cons tax wise for both personal residences and investment properties?

Again, I apologize for any confusion.

 

[navaz]

Principal residence-they have no write offs and the gain/loss in not upon selling is not taxable or deductible

Rental income -you are taxed on the net income after all reasonable expenses to maintain and manage the property such as repairs, interest, property taxes, travel etc. If it is a loss, you get to deduct it against other income

Upon sale -you pay tax on the profit-it may be a capital gain- if so you only pay tax on 1/2 the gain

 

[gwasser]

I would like to comment on your question regarding buying a primary residence vs rental real estate. When buying your primary residence, you are usually not buying for investment purposes. It is a way to establish a financially secure base with predictable and hopefully a lower cost of living. Residence ownership is an alternative to being a renter. As such you should never buy a house that is larger and more luxurious than you actually need. Yes, in the end when you sell cap gains are tax free, but then you`re most likely to move on to an even more expensive house and so you`ll never truly profit. In Canada, there are basically no tax issues other than property taxes and GST when buying a new house.

The big draw back of investing a lot of money in your personal residence is that it ties up a lot of money and thus there is an opportunity cost, i.e. what could you have earned if you had put the money of your house in an alternative investment such as stocks or rental real estate. To correct for opportunity costs you can take out an line of credit on you house and use that for investments.

In the 1980`s many financial advisers recommended that you invest the proceeds of such loans in RRSPs or even non-RRSP investment accounts. One such financial planner recommended me to do so in the summer of 1987. If I had done so, two months later in October of 1987, I would have been wiped out or at least lost a lot of money - especially if I had sold in a panic at the market bottom. That, along with other stock lending strategies such as buying on margin, is why using credit in volatile stock markets is extremely risky.

Rental property values are a lot less volatile and a much more suitable place to invest your line of credit in. Sure, real estate prices fall as well, but with exception of the 1982 Calgary Real Estate crash and the current U.S. real estate bust, real estate prices tend to rise steadily. Thus, here is a great opportunity to enjoy the benefits of leverage.

The drawback of rental property is its complex tax regulations which vary from province to province, yes most expenses are deductible but keeping track of all that takes time and money. Then there are GST issues which are a whole hornet`s nest by itself and finally, you have to deal with capital gains and the complexities of distinguishing between taxable income and taxable capital gains.
Basically, if your investment does not pay using REIN`s investment guidelines don`t buy and certainly don`t buy "because you can deduct your losses from your other tax". That is a road towards financial ruin!