My question is: Canadian-specific
QUESTION: I am considering purchasing an investment (rental)
property in the downtown Vancouver.
This would most likely be one bedroom + den apartment in the
concrete high-rise building. Current asking prices seem to be in
$300,000 range.
I am offered quite reasonable variable rate mortgage and are
trying to decide if there is any way to make a profit at the end
of the 3-year mortgage term.
Assuming:
- 10% down-payment
- 4% average mortgage rate
- $1,100 rental monthly income
- $200 monthly maintenance fee
I would still be in red $600/month.
At the end of 3-year period property value would have to increase
9%/year in order to just cover: all initial costs (down-payment,
property transfer tax, closing costs), on-going costs
(maintenance fee, property tax payments, and mortgage payments)
as well as realtor's fee (6% of property value).
What are the tax considerations in all of this?
I constantly hear terms like capital gain, rental loss etc., but
don't know how would they apply to my case.
Can you give me some general pointers that would allow me to
fully understand all cost involved?
Thank you very much!
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david ingram replies;
The major problem is that if your intent is to rent at a loss for
three years and then sell it for a capital gain, the rental
losses in the meantime are NOT a tax deduction. Rental losses
while you hold a property for resale are not deductible. To be
deductible against other income, rental losses must have been
incurred for the purposes of making an eventual rental income and
I guarantee that you will not make a rental profit in three
years.
The following cases are excerpts from my old Ultimate Tax Guide -
you can read the whole chapter at
http://www.centa.com/taxguide/rental_income.htm
In 1986, Ivan Glavanovic lost his claim for five years of rental
losses. He had built a house for sale in 1975 and was unable to
sell it. He therefore rented it out at a loss for six years. DNR
turned down his losses for 1979 and 1980. Judge Tremblay of the
Tax Court of Canada agreed with DNR. He ruled that the rental was
not to earn income but to hold on to the property. The losses
were therefore capital in nature and should be added to the
adjusted cost base of the house. It was also clear that there was
no reasonable expectation of profit from the rental.
Also in 1986, Kelvin Lee found the same thing. He had rented his
house on an option to purchase. Judge Couture of the Tax Court of
Canada ruled that the renting while holding had no expectation of
profit and was not deductible.
in 1989, Virginia Maloney was turned down by Judge Mogan of the
Tax Court of Canada. She had rented her house to her mother. The
rent charged was not realistic with regard to the cost of and the
maintenance to keep up the property. Ms Maloney had charged her
mother $100 rent in 1984 with $4,600 of expenses and $1,800 rent
in 1985 with $11,000 of expenses. See Special Problems below.
and in 1990, Michel-Guy Huot was also turned down for a deduction
when he rented a house to his parents for less than market value.
Judge Garon of the Tax Court of Canada ruled that the taxpayer
"Had failed to establish that the rental expenses were incurred
in order to earn income." Because of the low rent and the
uncertainty of their stay, there was no "expectation of profit."
Bulletin IT-533 found at
http://www.cra-arc.gc.ca/E/pub/tp/it533/it533-e.pdf is very clear
on the subject of interest deductibility. It shows that if your
investment is to make capital gains, the interest may be added to
the ACB of the property but not deducted against current income.
Admittedly, the bulletin does NOT use rental properties as an
example but the general tone of the bulletin is quite clear.
You need to sit down with someone who understands the premise
BEFORE you buy an alligator consuming $600 per month of hard
earned cash.
PS: Over the years I participated in the purchase and sale of
over 3,500 rental condominium units. At the moment, I do not see
rental profits in the purchase of downtown condos. There may be,
indeed WILL be a long term capital gain and with 7% increase in
rents, the rent received will double in ten years but there is no
guarantee.
For instance, a building on East Keith in North Vancouver has had
rent rise form $600 / month in 1987 to $950 a month today.
Another building at 145 East 4th in North Van had apartments sell
to "green" investors for $140,000 in 1981 and they are only in
the $180,000 range today, 24 years later. And, they went from
$140,000 DOWN to $38,000 in 1985. I know because I bought 16 of
them with two partners.
You have to be careful and make sure that you are not just buying
on hype.
I am of the opinion that anyone without an apartment to live in
should buy now if they are renting. The reason is that they are
not buying for resale and it does not matter if the property goes
down in value 10 or even 30% IN THE SHORT RUN because it WILL
rise again and pass the present sale price even if it is too
high.
However, if you hold on, waiting to buy when it goes down and it
doesn;t go down but goes up another $30,000, you have to earn
$60,000 and pay $30,000 of tax, CPP, EI and back and forth to
work expenses to have $30,000 left over to pay the difference.
Of course, you could finance the $30,000 at 4% and then you would
have to earn $100,000 more to make up the $30,000 plus interest
because THAT $30,000 IS the LAST $30,000 you pay off.
Hope this helps. Remember, if you have money for a down payment
on this unit, you should pay that money down on your existing
non-deductible personal home mortgage and then borrow the money
for the down payment. A good advantage of having investment
properties is that you can use the rent to make your own
residential mortgage deductible. Goto www.centa.com and read the
Nov 2001 newsletter (In box at top left of home page) for more
information. You can also come out to one of our Thursday
seminars on the subject.
Answers to this and other similar questions can be obtained free
on Air every Sunday morning.
Every Sunday at 9:00 AM on 600AM in Vancouver, I, david ingram am
a permanent guest on Fred Snyder of Dundee Wealth Managers' LIVE
talk show called "ITS YOUR MONEY"
Those outside of the Lower Mainland will be able to listen on the
internet at
www.600AM.com
Call (604) 280-0600 to have your question answered. BC listeners
can also call 1-866-778-0600.
Callers to the show and questioners on this board can also attend
the Thursday Night seminars on finance and making your Canadian
Mortgage Interest deductible.
David Ingram's US/Canada Services
US / Canada / Mexico tax, Immigration and working Visa
Specialists
US / Canada Real Estate Specialists
Home office at:
4466 Prospect Road
North Vancouver, BC, CANADA, V7N 3L7
Cell (604) 657-8451 -
(604) 980-0321 Fax (604) 980-0325
Calls welcomed from 9 AM to 9 PM 7 days a week (please do not fax
or phone outside of those hours as this is a home office)
email to taxman at centa.com
www.centa.com www.david-ingram.com
Disclaimer: This question has been answered without detailed
information or consultation and is to be regarded only as general
comment. Nothing in this message is or should be construed as
advice in any particular circumstances. No contract exists
between the reader and the author and any and all non-contractual
duties are expressly denied. All readers should obtain formal
advice from a competent and appropriately qualified legal
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message, this disclaimer must be included."
Be ALERT, the world needs more "lerts"
Every Thursday Evening, Fred Snyder of Dundee Wealth Management
conducts one of 17 different financial seminars at his office
Time: 7:00 to 9:30 PM
Date: Every Thursday evening
Place 1764 West Seventh
Vancouver (corner of Burrard)
Phone (604) 731-8900 to register
No cost - no obligation
Topics always cover mortgage interest as a deduction
other topics - getting the mortgage, estate planning, critical
care insurance, income taxation, differences between stocks and
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,
ask international income tax expert preparation & immigration
consultant david ingram, North Vancouver, BC, Canada experts on
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Fred Snyder's IT's YOUR MONEY
Hope this helps.
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