Managing your Tax Deductions

When investing in real estate, be sure to look at the tax implications of every penny you spend.

If you need to reduce your income tax payable, consider taking depreciation on Real Estate Properties. Depreciation is optional and can be accumulated, but can not be used to create a loss. You need to have a business strategy for your real estate business for this to make the best sense in your situation.

When purchasing real estate, make sure you create a separate schedule to the agreement of purchase and sale. For instance if a buyer wants the property cleaned up or fixed prior to closing have the price reduced by that amount and pay the vendor that amount as a credit on closing. That will ensure that the costs are 100% tax deductible and not part of the capital asset.

Avoid Tax Traps. If a real estate investor thinks they can buy and sell a lot of homes and just take capital gains, they risk falling into a tax trap. CRA’s position is that if you are actively trading properties, the money you earn is business income. So if you don’t have someone running the business for you and you are positioned as a passive investor, then the money you earn will be business income and taxed at your marginal tax rate.

Consider the smallest down payment possible. Zero Down is best. Down payments are capital in nature so are not tax deductible when they occur. The interest paid on income earning properties is tax deductible; passive or non-income earning properties interest is not tax deductible until you sell the property. If you are in Active Real Estate as a business then the interest is tax deductible.

Being a real estate investor means you need a good tax strategist and the proper business plan. The Q program, where they manage your real estate business, allows you to use the capital gains tax reduction strategy and still write off the interest.