Posted on: 26-08-09 13:35:17
I hope we can claim mortgage as an expense against rent income while reporting to the CRA .
If I were to buy a house for say 300K (amortization 25 yrs 4% rate of interest ) , how much mortgage portion can I claim as expense if I were to rent out this property ?
Would this expense (if admissible ) change if the amortization period changes to say 5 yrs ??
Can other expenses viz property tax and utilities be included as well as expenses ?
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Fido.
Quote:
Originally posted by Fido
I hope we can claim mortgage as an expense against rent income while reporting to the CRA .
If I were to buy a house for say 300K (amortization 25 yrs 4% rate of interest ) , how much mortgage portion can I claim as expense if I were to rent out this property ?
Would this expense (if admissible ) change if the amortization period changes to say 5 yrs ??
Can other expenses viz property tax and utilities be included as well as expenses ?
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Yes, they will permit you to deduct the Mortgage Interest portion of the transaction as an expense in the business transaction.
Generally, say, if the 300K attracts a $12,000 as interest and a $3000 as city taxes, and say $1000 as insurance fees, then they will allow these as deductions, if you rent it from the 1st of January to 31st of Dec of that year.
Since this is a business proposition, they will permit a certain depreciation on the value of the property also to be deducted from the profits that you will be making.
Most of the accountants will give you a breakdown of all of these, if you have some one to help you with all of these. Otherwise you can get all of the details from any group that you want to join and belong to. Please search the website for the local chapters.
You must always be in a "profit mode", at the end of the year, because you want to make money with this rental business.
Some repairs and maintenance expenses are also exempt. Or could be included as expenses paid to maintain the property.
Remember that the Insurance costs for the rental may be slightly higher than the one for ownership.
You must do a proper research prior to your entry into such a field as this.
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Quote:
Originally posted by Fido.....
Would this expense (if admissible ) change if the amortization period changes to say 5 yrs ??
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Yes, it will be admissible too, since it is the period that you have chosen.
All of the other expenses are to the tenant's account. Such as Water, Hydro, Heating, Mowing, snow removal and other maintenance of the appliances, light bulbs, tap washers, etc., he pays. If it totally fails then, you are on the hook.
Now to the crunch: Any gain that you make on the sale of the property is a Capital Gain and you will have to pay the taxes that it will attract and it will be clubbed with your income from any other sources, please see the Income tax returns or pick up a booklet on 'rental income' at the CRA offices or call them and they will mail you one. Go through them thoroughly and understand the same.
Or See some good books on such topics at the library. It is free.
Hope this helps you a little.
Freddie.
This helps a lot Freddie . Thanks .
Apparently since only the interest portion of the mortgage payment would be admissible as expense ... does it not make more sense to keep ammortizatioin period low (5 in stead of 25 ) so that one can repay the loan in 5 yrs and have max expense admissibility also ....
After 5 years when the house is paid out for , live in it yourself .
Does this make sense ?? And yes I hear you with regards to the blues of renting business ..... Can I buy a house under home buyers plan and rent it ? I hope no issues with that .
Thanks .
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Fido.
Would it keep you in a zero income mode or in a loss?
All of these are calculations that you will have to do with a calculator or with a program, have been generated and could be used at the touch of a button. So, talk with some of the investment groups that are in this business and who also run a group in the GTA area. They do the extensive research and buy properties and lease, rent, improve and sell OR Hold for a sale at a later date as the case may be is a science.
Now that you know what it is, join them. They know what areas are in demand for demolition and rebuilding etc., also. So, it is worth your time and research. Delve a lot deeper into it. Then, do it. I do see a future in this for you. So, pursue it further and get an handle on it. The day you can answer the questions that I will ask of you, and you can come up like a whip, you would have mastered the subject matter.
Here is what I am trying to get into. Buy land, divide it and develop it and split them into lots, but outside of the local GTA area. Then assemble (build) Pre Built homes on it. Not for sale, but for the whole group that one can form. It will be a little easier on the pockets for those who are just starting and will have all of the luxuries that one can afford at a decent salary, say $48,000+/annum.
Work with some ideas and you have your field to master. I am now in a mood to help settle a few comfortably.
Good Luck in your own.
Freddie
Edit: http://en.wikipedia.org/wiki/Depreciation
Hmm ...Freddie ..
For one a lot of thanks for your sincere and enlightening posts .
For two - you ve opened a little known vista for me . Whereas I was simply thinking of buying a house under 1st time HBP and renting it out for initial couple of years ..... you have brought in a new dimension ...... I guess I will have to spend some time knowing the basics of these investment .....
Possibly similar to yours , but an acquaintance had once suggesting purchasing land amongst a no. of investors and then selling it later to some builder if it can be held on to for a couple of years ....
I have been thinking of buying a commercial property as an alternative investment -- an office / suite in a commercial / medical building and then leasing it out ..... only risk I foresee is lack of occupancy ............. in case that happens ...
If a person has 50K capital , he can either own a 250K residential or 150K worth commercial property -- I wonder which one is more likely to give more returns and capitalization ? In a place like Brampton a 250K house might generate a net 5K income ..... I wonder whats the going rental rate for a commercial property worth 150K .
There s a fall back measure in case of residential property though that in case of lack in occupancy , you can occupy it yourself minimizing losses ...
Your take Freddie -- commercial or residential ?
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Fido.
From the same example of 300K building @ 4% interest, if you want to amortize over a period of 5 years, what would be your payments, be per month. What should be your minimum level of income you must make and the percentage of depreciation of say 3% per annum would leave you with at the end of five years.
All you will get is the interest deduction that you pay to the mortgage. Initially it is large, but would you have an income from it to justify it?
Your depreciation is a huge amount in the initial stages and that is the capital gains that you will have to address at the time of paying the capital gains tax on it, after selling it some time in the future. If you ever sell it.
One thing is for sure: You will pay an amount close to 55K in interest. Does not matter which way you slice it or dice it. The depreciation will be 15% or there about. You salary would have to be a minimum of 120K per annum to meet the basics.
That is with the use of the basic math and it is all a guesstimate.
Now to the next question: In the residential issue they normally look for the income of the individual and his capacity to Own and also pay for the rental property as a risk evaluation. They might also ante up the down payment. (Currently it might be 35% of the value??!!)
Where as in the commercial venture, the rate of return could be slightly higher, if it has 100% occupation 100% of the time. The books on the business plans will give you the right figures to use. You must see how many will join you and how you all can 'leverage' the amount in hand. *(i,e., the down payment could be less) There is a book and a software that I have heard of, when I locate it you can do some research with it and also do a proper Business Plan with it and take it to the nearest friendly bank manager and get his opinion. They are the masters in this field and they will provide you with a lot of info and stories.
We had two Gentlemen here one is BiG V and the other is the sparring partner here on ths CD board who are the ones that you should locate and work with. It is their daily bread. Also hit on TK and I am sure he either knows him or has met with him some time in the past.
All of this is from the back of my memory. I can verify it from the past posts here.
Now don't loose sleep over this. Just take it in stride and see where it will take you.
Good Luck.
Freddie
Will contact the people recommended for sure and - I was not expecting a response after I keyed in the last post last night but hey - you beat all assumptions .. Thanks a lot .
I feel that repaying in 5 yrs might be an over kill unless they allow negative income to be carried over as capital loss .... Ideally , the income from rent should equal the expenses (depreciation + interest + property tax ) and since the interest portion differs with each mortgage installment , an arithmetic calculation needs to be made keeping the other factors as constant .. Will update once I ve hit upon this ....
I will contact the Bank Manager also and update on that as well ....
Pray -- I was under the impression that down payment needed on residential is 20% and on commercial is 33.5% to avoid excess payments ..... Is this assumption correct ?
And one more thing -- I have the money , pre approval and currently a house also in sight ..... Can readily jump in and either live / rent it out .... perhaps renting makes more sense as of now with the prior mentioned theory ..... but the unusual component to the issue is --- I might not stay in Canada after 2 years ... now will that make a huge difference to the investment as renting in absence might convert the asset into a liability !! Are there real estate people ( part time property managers ) who can rent and manage your property for a fee and is it worth it .....
BTW ... if I do not go the 5 yr repayment plan , I intend to invest the amount @ 7.5% in SBI NRO FD recurring every month and get it back after 5 yrs and pay off the loan ...... as a tip for others as well....
Cmon other CD s also are welcome to pitch in with their thoughts ...
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Fido.
