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The taxing truth about investing in real estate

Real estate is a lucrative way to add diversity to your overall investment portfolio. Whether you...

Real estate is a lucrative way to add diversity to your overall investment portfolio.

Whether you’re a seasoned investor or looking to buy your first rental property, however, the tax implications of investing in real estate can be daunting.

Here are some of the different ways taxes can impact your overall strategy and how you can mitigate them to get the most out of your portfolio, bringing you closer to achieving your investment goals.

Land Transfer Tax

Land Transfer Tax (LTT) is often the most overlooked cost when purchasing a property. All provinces in Canada, with the exception of Alberta and Saskatchewan, apply a land transfer tax to the purchase price on the property.

Land transfer taxes are calculated based on the purchase price of your property. The higher the purchase price, the higher the land transfer tax.

If you’re a first-time home buyer and intend on living in all or a portion of the home – you might qualify for a rebate up to $4,000 on the LTT. However if you are not a first-time home buyer, you will be responsible for the full tax amount.

New construction

Purchasing an investment property such as a new construction house or condo has many advantages, including avoiding the costly repairs that come with owning an older home, and capitalizing on the value increase.

Did you know all new construction homes are subject to GST (five per cent) or HST (13 per cent) on the total purchase price, depending on the province in which it is located? However, if the purchase price is lower than $450,000, you may be entitled to a rebate on the GST portion of the tax.

Rental Income Tax

You’ve made it to closing day and you’re ready to start collecting monthly rent payments from your tenants.

In an ideal world, your rental income will cover your mortgage payment, your property taxes and your condo fees if the property requires them. At tax time, you’ll be required to report all the income you made from collecting rent, and you might be required to pay taxes at your marginal rate.

It’s important that you prepare for this throughout the year by setting aside funds to cover an unexpected tax bill as well as keeping track of any expenses that you might be able to deduct from your rental income.

Capital Gains Tax

In a seller’s market like the one we’re currently experiencing, it’s possible to realize a large profit when selling off your investment.

Be prepared to receive a hefty bill once tax time rolls around. Selling a property that is not your principal residence will automatically generate capital gains. This means 50 per cent of the profit you realized will be added to your annual income and you will be required to pay taxes on it at your marginal rate, likely bringing you to the highest tax bracket.

The best strategy to reduce the amount of capital gains tax you will have to pay is to create tax deductions.

If you have the contribution room within your RRSP, you could take the extra cash earned from the sale of the property and use it to make a larger RRSP contribution. If real estate is something that you’re interested in, you might want to consider a private REIT (Real Estate Investment Trust), which are RRSP-eligible.

This could offset the tax paid with a tax credit from the contribution.

It is important to understand the different tax implications that investing in real estate can create in order to prepare and potentially mitigate them. These are just a few ways you can benefit your overall strategy from a tax perspective.

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