Capital gains tax rules for principal residences

Many home owners are aware that the gain on sale of a principal residence is tax free.  Many are not aware, however, of the tax implications of renting out the principal residence.  In this situation, the property would have deemed to be sold at market value.  If the property has increased in value, there would be a gain on sale which could be subject to tax.

It is useful to know, however, that there is a provision in the Income Tax act that allows the home owner to keep their principal residence status for a period of 4 years after renting out the property.  To apply for this, the home owner must include a letter in their tax return stating their intentions.

This information is provided as general information.  If you are planning to rent out your principal residence, you should consult your accountant or lawyer.

Tips on minimizing taxes on your investment property purchase?

1) Consider getting a cashback on your mortgage - We generally don’t encourage our customers to use cashback programs since they can be expensive.  However, there is one situation where you may want to consider obtaining a cashback.  This is when you are purchasing an rental property.  When you get a cashback mortgage, the interest rate on the mortgage is increased to compensate for the cashback.  A tax advantage is generated because the increased interest on the mortgage is tax deductible while the cashback is tax free.

2) Make your current mortgage tax deductible - Many individuals have some cash available for a down payment on an investment property.  While you may think it wise to use the funds as a down payment on an investment property, you would be better off to pay down your home mortgage.  You then re-borrow the funds (on your home mortgage) for the down payment on your rental property.  By doing this simple maneuver, you are able to make a portion of your home mortgage tax deductible.

We do not profess to be financial planners, lawyers or accountants. Before you do anything consult the appropriate professional.

The Cost of an Auto Loan

Purchasing a new car can be an exciting experience.  However, many of us thiink nothing about how to finance that purchase. The choice of financing options could add thousands to the cost of your purchase.  Should you lease the vehicle? Should you take out an auto loan from the dealer or your bank or refinance your mortgage?

Let’s examine the cost of taking an auto loan from your bank.  Looking at one of the major bank’s websites, the prevailing rate for an auto loan is around 8%.  If you took out a $40K loan for 7 years, you’d pay a total interest of $12.369 over the life of that loan.  If you took out equity from your home, you’d pay $7.632 over the same period (@5.09% interest).  That’s a difference of $4,737.

While taking out equity from your home will save you money, you’d have to consider the added set-up costs of amending your mortgage (i.e., appraisal and legal costs).

This is why planning ahead is a wise thing to do.  For this scenario, the best structure for your mortgage is an umbrella mortgage.  An umbrella mortgage will provide you with the flexibility to re-borrow from your home equity for much needed expenses (or for investment purposes) without any additional expense.   This type of mortgage is also the best for converting your mortgage to a tax deductible mortgage.

Can you benefit from a longer amortization?

There are many reasons why borrowers opt for longer amortization mortgages.  For one, this allows borrowers to qualify to purchase a larger home.  Secondly, with lower mortgage payments, makes the payments easier for borrowers.

There’s a BETTER reason why someone who could easily afford a 25 year amortization should consider a 40 year amortization mortgage.  This is to build an investment portfolio and take advantage of tax benefits from making RRSP contributions.

Let me illlustrate.  If you took out a $300K / 25 year amortization mortgage, your payments would be $1,796 per month (@5.3% interest).  The payments on the same mortgage on a 40 year amortization payment plan would be $1,495 per month.  What if. instead of taking the 25 year mortgage, you took the 40 year amortization mortgage and invested the difference of $301 ($1796 less $1,495) in a RRSP savings plan.  Assuming a 30% tax bracket and an 8% Return on Investments (ROI), your networth would be higher by $185K in 25 years.

If you took this plan further by taking out an Interest-Only mortgage, your networth would increase by $282K.

This strategy will only work for borrowers who have the discipline to invest the difference in monthly payments.  If you’re looking to achieve financial security and a larger net worth, this is a strategy you need to consider.  Talk to your financial advisor about this approach.  On the other hand, if you are the type to spend the difference, you’re better off to take the shortest payment plan and make bi-weekly payments.

Please call or email me to discuss how you can use your mortgage as a tool to build your wealth and financial security.