5 Ways to Make (or lose) Money With Investment Properties – Part 4 – Taxation

by Mr. Cheap

Go the first post in the 5 ways to make money with investment properties series.

I haven’t had personal experience with this part of making money with real estate, but everything I read and hear seems to make the case that its typically a significant part of an investor’s return.

Once I read that basically the more “unusual” whatever you’re doing is, the better the taxation. At a certain level this makes sense, the government is best served by getting the biggest chunk of the largest amount of economic activity. Based on this idea, the advice was that the more “typical” an activity (like working a 9-5 job), the heavier the taxation. Real estate investing is hardly new, but not everyone does it, and therefore its given a bit of a tax break. Additionally, its viewed that there’s a positive outcome for society (increased amount of shelter) and its worthwhile on that basis as well for the government to encourage the activity.

Go the first post in the 5 ways to make money with investment properties series.

Anything you spend on your property is typically a deduction (i.e. you don’t pay tax on the money you earn to pay for that). So if you pay $1000 to get your property re-painted, you won’t have to pay taxes on $1000 of rental income (since you spent it on the property instead of putting it in your pocket). SOME people exaggerate their expenses to keep more of their money from being taxed, but I think this is a very bad idea (if you want to pick a fight with someone, don’t go after Revenue Canada!).

The real advantage (which I’m looking forward to) is the ideas that you can “depreciate” your property. Say you had a rental property that had earned you $250 / month ($3000 over the year). Typically if you were in a 40% tax bracket you’d owe $1200 in taxes on this money. What depreciation lets you do is assume that the value of your property declines over time. You get tax savings based on this decline. When you sell your property, you pay capitial gains taxes on the sale price – the purchase price + the depreciation. Thus depreciation lets you defer taxes until you sell the property (which its obviously better to pay the taxes in the future instead of right now). ADDITIONALLY, depreciation lets you not pay taxes on income, and instead pay it later as capital gains (at half-rate) (Please see the comments, I misunderstood this).

Obviously I don’t have the best grasp on this yet (I’m planning to take the H&R block course this fall so that I’ll gain a better understanding), but the basic ideas that real estate investors all seem to agree on is that you pay a lot less taxes on money you make from real estate then money you make from other investments.

Ways that you might abuse this concept to lose money is when you pay for a deduction (e.g. if a real estate deal is a bad deal, doing it for the tax deduction is probably a bad idea). Also, if you get too caught up in this idea and start doing illegal things (again, a very bad idea), you might be trading slight gains for jail time (no fun).

Go to the next post in the series buying at a discount.

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