Comments on: 5 Ways to Make (or lose) Money With Investment Properties – Part 4 – Taxation http://www.moneysmartsblog.com/5-ways-to-make-or-lose-money-with-investment-properties-part-4-taxation/ Investing and Personal Finance Sat, 11 Feb 2012 17:11:02 +0000 hourly 1 http://wordpress.org/?v=3.3.1 By: <![CDATA[telly]]> http://www.moneysmartsblog.com/5-ways-to-make-or-lose-money-with-investment-properties-part-4-taxation/comment-page-1/#comment-1669 Tue, 07 Aug 2007 21:02:53 +0000 http://www.moneysmartsblog.com/5-ways-to-make-or-lose-money-with-investment-properties-part-4-taxation/#comment-1669 Here's how someone broke it down on the Canadian Business forums (I love it when others do the math ;)): Assuming Ontario, a 7% opportunity cost (with the refund) and a 46% tax rate at the time of disposing of the property, if your current marginal rate is: 46% -> claim CCA 43% -> claim CCA if you'll keep the property for at least 1 year 35% -> claim CCA if you'll keep it for 5 years 31% -> claim CCA if you'll keep it for 6 years 21% -> claim CCA if you'll keep it for 12 years 7% Opportunity cost = return of the deduction you get. For example, if it's put in a stock expected to appreciate 7% per year. If your marginal tax rate is 46% this year, claim the CCA. It's free money because the worst that can happen is that you'll have to be taxed at 46% next year. You're flush at worst. If your marginal tax rate is 43% and you were able to invest the deduction at 7% for 1 year, you'll be ok even if you sell next year an pay 46% tax on the CCA recapture. If your at 31% and expect to make a 7% return by investing the deduction, take the CCA deduction only if you think you'll hold on to the property for 6 years if there is a chance you'll pay taxes at 46% when you sell. Lots of variables can positively change the conclusion: - You may be taxed at lower than 46% in the above examples. Example, if you deduct at 31% and sell 3 years later with a small gain, you may still remain at 31% or 35%. - If you put the $4000 in an RRSP and put the RRSP refund (of $1200) in an RRSP and make 7% of $5200 return, it's better faster. So it's all rules of thumbs, and with every rule, there is an exception. The assumption is also that there is an opportunity to make money with the deduction. If you blow it on a $1200 trip, you have potentially borrowed the money for the trip and you'll pay the trip off in 10 years at $1800 The thread can be found here: http://forums.canadianbusiness.com/thread.jspa?forumID=16&threadID=3593&messageID=121101#121101 Here’s how someone broke it down on the Canadian Business forums (I love it when others do the math ;) ):

Assuming Ontario, a 7% opportunity cost (with the refund) and a 46% tax rate at the time of disposing of the property, if your current marginal rate is:

46% -> claim CCA
43% -> claim CCA if you’ll keep the property for at least 1 year
35% -> claim CCA if you’ll keep it for 5 years
31% -> claim CCA if you’ll keep it for 6 years
21% -> claim CCA if you’ll keep it for 12 years

7% Opportunity cost = return of the deduction you get. For example, if it’s put in a stock expected to appreciate 7% per year.

If your marginal tax rate is 46% this year, claim the CCA. It’s free money because the worst that can happen is that you’ll have to be taxed at 46% next year. You’re flush at worst.

If your marginal tax rate is 43% and you were able to invest the deduction at 7% for 1 year, you’ll be ok even if you sell next year an pay 46% tax on the CCA recapture.

If your at 31% and expect to make a 7% return by investing the deduction, take the CCA deduction only if you think you’ll hold on to the property for 6 years if there is a chance you’ll pay taxes at 46% when you sell.

Lots of variables can positively change the conclusion:

- You may be taxed at lower than 46% in the above examples. Example, if you deduct at 31% and sell 3 years later with a small gain, you may still remain at 31% or 35%.

- If you put the $4000 in an RRSP and put the RRSP refund (of $1200) in an RRSP and make 7% of $5200 return, it’s better faster.

So it’s all rules of thumbs, and with every rule, there is an exception. The assumption is also that there is an opportunity to make money with the deduction. If you blow it on a $1200 trip, you have potentially borrowed the money for the trip and you’ll pay the trip off in 10 years at $1800

The thread can be found here:
http://forums.canadianbusiness.com/thread.jspa?forumID=16&threadID=3593&messageID=121101#121101

]]> By: <![CDATA[telly]]> http://www.moneysmartsblog.com/5-ways-to-make-or-lose-money-with-investment-properties-part-4-taxation/comment-page-1/#comment-1668 Tue, 07 Aug 2007 20:45:13 +0000 http://www.moneysmartsblog.com/5-ways-to-make-or-lose-money-with-investment-properties-part-4-taxation/#comment-1668 Actually CC, CCA recapture (depreciation) is taxed as income the year that you sell. I thought the same but was corrected (check the cra website). Also, in certain cases (depending on your tax bracket), it may not be beneficial to claim CCA on rentals over the years because if you sell with a large amount of recapture, you may push yourself into a higher tax bracket the year you sell. For example, if you're claiming recapture in the current year to save taxes in the 33% tax bracket and then you end up paying it back when you're in the 43% tax bracket due to increased wages AND recapture income (in Ontario it only takes ~$4000 to go from 33% to 43%), you would have been better off NOT claiming CCA. The only thing I would add is that you can't use CCA to claim a loss (or increase a loss) on a property. This might be especially important in years where you have major repairs, etc. I'm no tax expert either (!) but we don't claim CCA on our two rental properties though some math could probably be done to figure out what makes the most sense for you. We haven't actually done that... Actually CC, CCA recapture (depreciation) is taxed as income the year that you sell. I thought the same but was corrected (check the cra website).

Also, in certain cases (depending on your tax bracket), it may not be beneficial to claim CCA on rentals over the years because if you sell with a large amount of recapture, you may push yourself into a higher tax bracket the year you sell. For example, if you’re claiming recapture in the current year to save taxes in the 33% tax bracket and then you end up paying it back when you’re in the 43% tax bracket due to increased wages AND recapture income (in Ontario it only takes ~$4000 to go from 33% to 43%), you would have been better off NOT claiming CCA.

The only thing I would add is that you can’t use CCA to claim a loss (or increase a loss) on a property. This might be especially important in years where you have major repairs, etc.

I’m no tax expert either (!) but we don’t claim CCA on our two rental properties though some math could probably be done to figure out what makes the most sense for you. We haven’t actually done that…

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