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Capital gains explained

Source: MoneySense.ca – by   

 

Capital gains explained

How it’s taxed and how to keep more for yourself

What is it?

You have a capital gain when you sell, or are considered to have sold, what the Canada Revenue Agency deems “capital property” (including securities in the form of shares and stocks as well as real estate) for more than you paid for it (the adjusted cost base) less any legitimate expenses associated with its sale.

How is it taxed?

Contrary to popular belief, capital gains are not taxed at your marginal tax rate. Only half (50%) of the capital gain on any given sale is taxed all at your marginal tax rate (which varies by province). On a capital gain of $50,000 for instance, only half of that, or $25,000, would be taxable. For a Canadian in a 33% tax bracket for example, a $25,000 taxable capital gain would result in $8,250 taxes owing. The remaining $41,750 is the investors’ to keep.

The CRA offers step-by-step instructions on how to calculate capital gains.

How to keep more of it for yourself

There are several ways to legally reduce, and in some cases avoid, capital gains tax. Some of the more common exceptions are detailed here:

  • Capital gains can be offset with capital losses from other investments. In the case you have no taxable capital gains however, a capital loss cannot be claimed against regular income except for some small business corporations.
  • The sale of your principal residence is not subject to capital gains tax. For more information on capital gains as it relates to income properties, vacation homes and other types of real estate, read “Can you avoid capital gains tax?
  • A donation of securities to a registered charity or private foundation does not trigger a capital gain.
  • If you sell an asset for a capital gain but do not expect to receive the money right away, you may be able to claim a reserve or defer the capital gain until a later time.

If you are a farmer or a newcomer to Canada, they are special capital gains rules for you. The specifics can be found at the CRA website.

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Pay less tax on rental properties

Q: I have five rental properties in my name. Should I switch them to a numbered company?

–Travis

A: Hi, Travis. Incorporating a holding company to own rental properties has some advantages and disadvantages depending on the objectives you have in mind in both the short and long term. However, you should first speak with a tax accountant about any tax ramifications both personally and corporately to ensure as perfect an integration of the two systems as possible. Then speak with a legal advisor to draft up the appropriate corporate structure before making the transfer.

From a tax point of view, there are two things to consider. While the transfer of real property held personally should qualify for a Section 85 election to rollover the properties at their cost base, you will want to be sure the CRA will not consider your properties to be held as “inventory”; that is property, held primarily for resale rather than rental. If so, they will not qualify for a tax-free rollover or capital gains treatment. Therefore, the transfer could trigger unexpected tax consequences. Your history of receiving rental income from the property will help you avoid this.

Second, you’ll also want to understand the difference in taxation rates both inside and outside of the corporation. Recent tax changes may have made it less desirable to own passive investments inside a corporation, depending on where you live in Canada.

Some advantages of incorporation include limited liability and creditor protection. However, if you are holding mortgages, most financial institutions will still require personal guarantees. Corporate directors and officers can also be held liable on default, so proper insurance protections for these instances is critical.

From a retirement planning point of view, incorporation may provide more flexibility as to when income is taken as dividends. It could help you to avoid personal taxes or spikes into the next tax bracket, and benefit from the recovery of refundable taxes in the corporation.

Consider also that there will be costs for setting up and annual reporting of the holding company. Transferring the properties from the taxpayer to a holding company may have tax consequences, other than income taxes. If your province has a land transfer tax (or equivalent), you may have to pay the land transfer tax when the properties are transferred.

The bottom line is this: you’ll want to be thoughtful about the transfer, and you’ll want to match your investment objectives and desired tax outcomes as closely as possible.

Source – MoneySense.ca – Evelyn Jacks is a tax expert, author, and founder and of Knowledge Bureau in Winnipeg

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Still thinking of home ownership as an investment? Here’s proof you’re wrong

 

Source: The Globe and Mail

Take some advice from rookie home owner Desirae Odjick about houses as an investment.

As a personal finance blogger, she ran the numbers on the cost of owning a home and concluded that breaking even would be a good outcome when it comes time, many years down the road, to sell. “A house is not a long-term investment,” she said in an interview. “It’s not a miracle financial product. It’s where you live.”

The idea that owning a house is an investment is so ingrained that a recent survey found one-third of homeowners expect rising prices to provide for them in retirement. But rising prices do not necessarily mean houses are a great investment.

Ms. Odjick lives in a suburb of Ottawa, where the real estate market’s recent strength still leaves it way behind price gains seen in the Toronto and Vancouver areas. But her point is relevant to all markets where prices aren’t soaring, and probably to hot markets as well if you’re just now buying a first home and understand that continuous massive price gains are unlikely.

In terms of home upkeep costs, Ms. Odjick and her partner have had an easy time of it since they bought in the spring. But they’ve still had expenses that surprised them. “You can use all the calculators you want and you can plan as much as you want, but until you’re in it you really don’t know what the costs are going to be.”

One example is the $3,000 spent at IKEA to equip the house with furnishings as mundane as bathmats. Another was the cost of term life insurance, which, incidentally, is a smart purchase. Term life answers the question of how the mortgage gets paid if one partner in a home-owning couple dies.

Estimates of the cost of upkeep and maintenance on a home range between 1 and 3 per cent of the market value. Her house cost $425,000, which means that upkeep costs conservatively estimated at 1 per cent would come out to an average of $4,250 per year and a total $106,250 over 25 years. Ms. Odjick is too recent an owner to have much sense of these costs, but the housing inspector she used before buying warned her to expect to need a new roof in two or three years.

She and her partner don’t have grandiose plans to fix their place up right now, but she did mention that they are looking at having children. There will almost certainly be expenses associated with getting the baby’s room ready.

In her own analysis of housing costs, Ms. Odjick estimated the cost of property taxes at 1 per cent of a home’s value. That’s another $4,250 per year. This cost would add up to $106,250 over 25 years, and that’s without annual increases factored in.

The biggest cost homeowners face is mortgage payments. Ms. Odjick and her partner made a down payment of 10 per cent on their home and chose a two-year fixed-rate mortgage at 2.71 per cent. Assuming rates stay level and no prepayments are made, this would theoretically work out to a total of $542,122 in principal and interest over the 25-year amortization period.

But rates have crept higher since mid-summer and could increase further in the months ahead. In a post on home ownership on her Half Banked blog, Ms. Odjick said the idea of rates staying level “is bananas and will not happen.”

Let’s add up the costs of home ownership as likely to be experienced by Ms. Odjick over 25 years. There’s the $42,500 she and her partner put down to buy the house, the $106,250 cost for each of property taxes and upkeep/maintenance and $542,122 in mortgage principal and interest. Total: $797,122.

Now, let’s imagine the $425,000 house appreciates at 2.5 per cent annually for 25 years. That’s in line with reasonable expectations for inflation. The future price in this case would be $787,926, which means Ms. Odjick and her partner would have paid a bit more in costs than they get for selling their house in the end.

Houses can be sold tax-free if they’re a principal residence, so there is something to the house-as-an-investment argument. But the numbers comparing what you put in and what you take out over the long term don’t exactly scream “financial home run.”

Ms. Odjick’s fine with that, because buying her home was a lifestyle decision. “If we’ve lived here for 25 years, even if it does end up costing money, then it will have been a great place to live.”

Are you a Canadian family that has made a financial decision to remain lifelong renters? If you would like to share your story, please send us an email

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Five ways to maximize your investment property

Wasim Elafech of Century 21 Bravo Realty in Calgary is among the banner brokerage’s top sales agents in the world. Century 21 operates in 78 countries with over 100,000 agents, and Elafech managed to become their number one unit producer in 2015 and number three in Canada last year, so he knows a thing or two about getting the best bang for your buck out of a rental property. He shared some of those tips with us.

1. Maintain the property
Elafech says some he’s sold properties to clients who in turn rented them out, but without putting in the necessary work. “The work you do doesn’t have to be expensive, but it has to be brand new,” he said. “It will be liveable but it won’t look good. The floors will be cracked or peeling, and when people walk in they get the impression it’s a rundown property, but they won’t if you do the work. Make sure all the fixtures work, that they’re not broken; make sure door handles are loose or need to be replaced. If the place is well-maintained, 100% of the time you’ll get more money for your rental.”

Elafech added that properties are often reflections of the people who live in them.

“A really good tenant won’t look for a rundown place, first of all, so they wouldn’t take that place. You’ll attract the type of people your property looks like. People who accept living (in shabby properties) aren’t the best tenants.”

2. Bungalows yield higher rents
Bungalows are excellent rental properties because the top and bottom floor can be rented out as separate units. “One guy I know pretty much made his whole house different rooms with a common living room, couch and TV.”

Typically, however, the upper and lower floors of a bungalow can be rented as separate units. “Bungalows are the easiest houses to sell in certain areas here because you can rent the upper and lower levels, if it’s properly treated. In an area where you’re renting a whole house to a person, you’d get, say, $1,600 a month, but if you’re renting the floors separately, you can get maybe $2,200 a month. It’s about volume.”

3. Screen your tenants
Screening tenants adequately ensures your rental investment doesn’t become a nightmare.  “I see it a lot,” said Elafech. “They don’t want to lose a month on the mortgage payment, so if it’s been sitting for a couple of weeks they’ll rush into a deal and rent it to whoever comes next, and sure enough the people either do a midnight run or don’t pay. I’m going through that now with my client.”

Elafech recommends waiting it out, even if that means the property sits empty for a month or two. Ask tenants for references and their job history. “If the tenant is reluctant, there’s usually a reason. Keep a look out for red flags.”

He also suggested hiring a rental management company if an apartment building, rather than two or three properties, needs to be maintained. While pricey, they’re well worth it – and they screen tenants.

Sometimes, though, less is more.

“I have a client that’s renting out a house with a garage for $1,000 month that usually goes for $1,800, because he has a good tenant. He cuts the grass and maintains the property. He does everything for the landlord, so that peace of mind is worth more than the money he’d get from renting the parking pad and garage in the back.

4. Rent the garage and parking spot separately
Elafech mentioned a rental property he’s currently showing. “The owner is going to park his trailer on the parking pad, rent out the garage and both floors of the bungalow separately – rental income from upstairs, downstairs and the garage.”

5. Location, location, location
Location is everything in real estate, so Elafech recommends investing in a property that’s surrounded by prime amenities like transit and schools.

“In Calgary, we have LRTs and buses. Even having shopping centres and schools nearby is important. A client had a condo with an LRT across the street, and he got more for it than a similar place he owns that had a similar layout but was a bit bigger, because it was six or eight blocks away and farther from the LRT. In Calgary, when it’s minus-40 outside, you’re not walking, or waiting for a bus when it’s cold. People pay for convenience.”

Source: Canadian Real Estate Wealth – Neil Sharma

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What share of GTA condos are flipped? New report offers insight

gta-condos

Soaring price appreciation in the Greater Toronto Area’s high-rise segment is encouraging condo investors to flip their units more rapidly.

So suggests the latest quarterly report from Urbanation, a Toronto-based real estate consulting firm.

This burgeoning trend is reflected in the 9,932 condo units that changed hands in the first quarter, a 73 per cent increase over activity in the first three months last year as well as a quarterly high.

Looking only at units in condo developments that were completed by builders and registered in the last two years, a total of 1,059 transactions were recorded in the first quarter.

In the first quarter of 2016, condo owners sold a total of 625 units in buildings completed throughout the preceding two-year window.

“The shortening of holding periods for some condo buyers is an outcome of the rapidly accelerating market,” says Shaun Hildebrand, senior VP of Urbanation, in a statement.

The average sale price of a resale condo unit in Q1 this year was $510,000, representing a 24 per cent increase over that period last year, according to Urbanation.

“Following the recent strength in condo price appreciation, Urbanation noted an increase in resale activity within newly completed buildings as well as more units transacting twice within shorter timeframes,” the consultancy’s report reads.

In fact, according to past Toronto Real Estate Board numbers, resale condo prices were increasing annually by a far more restrained 9.3 per cent as recently as September 2016.

With year-over-year appreciation well above 20 per cent now, a relatively recent development, it’s easy to see why some recent homebuyers would be compelled to sell sooner.

However, Urbanation’s Hildebrand notes flipping is not widespread — for now.

“Although the share of short-term condo market participants still appears relatively low, it will be important to monitor the situation closely going forward as market conditions evolve,” he adds.

Source: BuzzBuzzHome.com – 

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Reporting the sale of a rental property

Q:  I bought a house in 2010 for $600,000 and lived in that house as my principal residence until 2013.  Then I bought and moved into another property. I rented out the first house and reported all income on my tax returns. In 2016, I sold the rental property for $900,000. When I file my tax return for 2016, how much capital gains am I supposed to declare and report to the CRA?  Is it $900K minus $600K, minus the cost of disposition; or $900K minus whatever the deemed fair market value of the property at the time when I moved out in 2013, minus the cost of disposition?      

— Wallace, Toronto


Ayana Forward is a Certified Financial Planner with Ryan Lamontagne Inc. in Ottawa: 

You are entitled to a principal residence exemption for the time you lived in the residence—between 2010 and 2013. The formula for calculating your principal residence exemption also includes an extra year so you will have four years of exemption according to the formula.

The formula is as follows:
((# of years home is principal residence + 1)/# of years home is owned) x capital gain

Your capital gain before factoring in the principal residence exemption is your proceeds of disposition ($900,000) minus your purchase price ($600,000), which works out to $300,000.

Using the above formula, your principal residence exemption is:

((3 + 1)/6)  x $300,000 = $200,000

Your capital gain after factoring in the principle residence exemption is $100,000 (as $300,000 minus $200,000 = $100,000). Because it’s a capital gain, the CRA will only charge you tax on 50% of that gain, resulting in a taxable capital gain of $50,000.

The amount of tax you pay on that $50,000 will depend on your marginal tax rate.

To report the sale and tax owed, you must complete form Form T2091(IND) Designation of a property as a Principal Residence by an Individual (Other Than a Personal Trust) and file it with your income tax return.

Source MoneySense.ca –  Ayana Forward  is a real estate investor who also holds the Certified Financial Planner (CFP®) designation. Ayana is fee-based Financial Planner with Ryan Lamontagne Inc in Ottawa, ON.

 

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Real Estate Investing, It Isn’t Just for the Boys Anymore

When 51 year old stay-at-home mom and part time piano teacher Gena H. from Washington State woke her husband up at 1:15 AM and said “I want to be a real estate investor,” he patted her on the shoulder and said, “that’s nice dear.” In the morning he shared all the reasons he believed it could not work for her. Fast-forward a few years and Gena, who obviously didn’t listen to the husband she adores, is a successful and very profitable investor. She has in her words “dramatically changed the financial course for me and my entire family.”

Stories like these are coming to my attention at a rate like I’ve never seen in my well over 20 years of investing. I’ve been fortunate to watch countless people go from real estate observer to successful real estate investor. But never before has there been such a massive wave of women taking ownership of the household finances using real estate.

In watching this transition, I believe it’s due to a couple of primary factors. First, we all know that the real estate market peaked like never before around 2006, and then the bubble burst and the market crashed. It reminded me of flying down Space Mountain in Disneyland. However, after the bottom comes the inevitable shift in the market, when it begins trending back up as we are seeing now. This is truly a magical time for investors.

Second, I think we are heading into the years of more empowerment of women. I could be criticized for saying this, but I think it’s less about women’s liberation, as that was yesterday’s news. I see it as more that women are just losing any hesitation at all to do anything they want. I think it’s a very positive trend for our country. I watched my single Mom struggle to support my sister and me growing up, so I’m always cheering for the ladies. I think we are entering a whole new era of advancing equality. But that’s for another story.

Jen G., a single Mom, was working in an accounting office with no windows and too little pay each month to support her and her son. Frustrated, stressed and wanting a new path in life, she decided to reinvent herself through real estate investing. Friends and family told her real estate investing was for people with money and experience. Some even expressed resentment and actively discouraged her. Recently, Jen called to tell me: “Just six months after starting, I got to walk into my office and tell my boss I no longer needed her services!” Jen quit her job and has done more than 185 real estate transactions so far and feels she is being the Mom she always wanted to be.

Tammy R. lives in a crazy fast moving market in CA. This is a market where even seasoned investors are afraid to take the plunge. However, this determined Mom of four, who was homeschooling her children when she started investing, refused to yield to her fears. She didn’t listen to her husband who said “it won’t work for you.” Like Jen, she didn’t have a ton of money to start, but researched a method called “wholesaling.” Wholesaling is matching up monied investors with good deals, and making money in the middle. On one transaction alone she made more then she did the prior two years, and she is currently working on her 23rd deal. “You just can’t let the naysayers spoil your dreams” she said when asked about the secret of her success.

Whether you’re in a strongly rebounding large urban market like Tammy, a more rural and smaller city in Alabama that’s coming back at a slower pace like Jen, or somewhere in the middle like Gena in Washington State, it doesn’t matter. The current state of all of these markets is opening up endless opportunities for investors to gain the knowledge to profit and who aren’t afraid to go for it.

Real estate is my life, and with over 20 years of non-stop investing I’ve personally experienced that there is always a profitable strategy that fits the current market cycle. However, the massive spike in real estate, followed by the inevitable and dramatic crash, is setting up a solid rebound. I truly believe this is the greatest time for everyone who would like to secure a better future to get educated, learn from those who are doing it, and jump into real estate investing.

I’m currently doing 30 to 50 deals every month all around the country, in 9 states actually. I’m working with women like Gena, Jen and Tammy, as well as a slew of others who are crushing todays shifting real estate market rather then complaining about it.

Maybe real estate investing is cooler and more possible then you think. All I can say is that the boys better step up.

Source: The Huffington Post 07/12/2013 –   Dean Graziosi

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