My question is: Canadian-specific
QUESTION: Mr Ingram:
I got your kind response to my real estate question earlier this month.
It was basically regarding renting an apartment (single investment property)
at a loss for three years and then selling it for a capital gain.
You mentioned that:
1) if it can be proven that the INTENT was to rent at a loss, the rental
losses would not be considered as a tax deduction by Revenue Canada.
2) At this moment you don’t see rental profit in the purchase of Vancouver
downtown condos
3) One strategy when buying investment properties would be to borrow the
money for the down-payment (tax-deductible), + use rent-income to faster
pay-off your personal home mortgage (non-deductible).
Considering three items above, my conclusion is:
1) One should use item-3 strategy only if he can present a business plan (to
Revenue Canada) that is based on reasonable assumptions and results in
break-even (or profit) after 3-year period.
Note:
3-year period was suggested by local accountant who claims that:
- Revenue Canada would do nothing regarding losses in the first year
- May take notice but again do nothing in the second year
- May easily request an audit after third straight year of losses
My realtor fully supports item-3 strategy and his suggestions are:
1) That I open home-equity LOC (I own personal home)
2) Pay 25% down-payment from home-equity LOC (approx $75,000 for $300,000
condo)
3) Claim all investment expenses (including initial closing costs, loan
interest, property tax, maintenance fee, etc.) on my tax return
4) Use rent money to pay off my personal home mortgage
I put his suggestion on paper and it seems that:
1) First year (2006):
- Tax-deductible Expenses: $25,500 (including initial closing costs)
- Rental income: $12,100 (max. $14,000) into personal mortgage
- Add $14,000 (personal money) to personal mortgage
2) Second year (2007):
- Tax-deductible Expenses: $21,000
- Rental income: $12,100 (max. $14,000) into personal mortgage
- Add $14,000 (personal money) to personal mortgage
- I could pay-off my personal home mortgage at the end of year
3) Third year (2008):
- Expenses: $18,000
- Rental income (end of year 3): $12,100 (max. $14,000) into the LOC.
Our questions:
1) Considering that our regular monthly expenses will increase by $2,300 due
to LOC/Mortgage payments (and other expenses), what is the expected refund
from the Revenue Canada for each dollar claimed as an expense?
2) Do you agree with 3-year rule for audits? Our worst-case scenario is that
after 3 years of being in red we could not only be denied all rental losses,
but also taxed in full, if Revenue Canada interprets this as flipping.
3) Based on information above and current situation on the market, do you
have any general recommendation for us regarding the purchase of downtown
condo at this time?
Our alternative strategy is to pay personal home mortgage in full (which we
could possibly do by the end of 2007) and then start looking for the new
property.
Again, thank you very much for your time!
xxxxx
---------------------------------------------------------------------------
david ingram replies;
Your questions go past the free nature. This is the kind of thing that I
charge between $400 and $800 to deal with But in general:
You cannot deduct the closing costs against rental income. Closing costs
become part of the adjusted cost base of the unit.
The Questions:
1. Depends on your taxable income. At $30,000 you save about 24 cents for
every dollar of rental loss. At $130,000 you save about 45 cents for every
dollar lost (or RRSP purchased or Flow through share purchased).
2. There is no such thing as a three year rule. I have personally
participated in the sale of over 3,000 rental condos with rental losses
projected into the 11th year. None were ever reversed by the CRA that I
know of.
3. There are likely a dozen ramifications involved that would change what I
think you should do.
Hope this helps a bit.
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 regular
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