Bidding Wars & Tax Incentives In Real Estate

When the world changed this time last year, we saw unemployment rates at a low with the decrease in the housing market and mostly every other market. Today, a year later we now see the prices of homes in Canada on an uprise, with many homes going hundreds of thousands of dollars over not only the assessment but even the asking price! Which has created many bidding wars and created a very hot market. In fact, Jason Heath a Certified Financial Planner (CFP) at Objective Financial Partners Inc. says that as the housing marketing process continue to rise, there may be tax incentives that could benefit renters, investors and seniors without further contributing to higher prices.

According to Heath, Real estate investors can claim a variety of tax deductions when they own a rental property. In fact, these investors can actually deduct their rental expenses against rental income including mortgage or line-of-credit interest. As well they can claim depreciation which is the value of an asset that decreases over time due to the use, as a tax deduction. What does this mean? Well, let us say that you are a real estate investor who has invested in multiple rental properties, and one is valued at $500,000 with a $400,000 mortgage at 2 percent, you as an investor may also be able to claim around $8,000 in annual interest costs. In addition, because of depreciation, you could also be provided up to an additional $20,000 in tax deductions. Heath, mentions that a high-net-worth investor could save 50 percent tax or $14,000 by claiming for these deductions, in addition to deductions for property tax, insurance and condo fees.

In fact, as the British Columbia real estate market and prices rise, naturally the mortgage interest and depreciation deductions rise with them, while tax credits available for a renter(s) are based on inflation annually. One of the restraints for a real estate investor when selling a property is regarding capital gains taxable on appreciation, which is be the increase in the selling price of the property from its original acquisition cost. In addition, the capital gain is subject to taxation, as well as restructuring and full income inclusion of all previously claimed depreciation. In fact, the tax hit for the investors can be significant enough to keep from selling to a potential homeowner who may want to live there.

The information above was based on the information provided by Jason Heath who is a Certified Financial Planner (CFP) at Objective Financial Partners Inc. As always, please consult your accountant on any information regarding taxation impact before making a real-estate purchase or sale decision.

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