It’s not always an easy answer. I would lean towards renting it to her, makes the mortgage tax deductible. While that tax deductibility is a definite savings, it’s hard to calculate the amount of tax paid when selling the place without predicting the price in the future.
Rental or Principle Residence?
A friend of mine is going to help his mother buy a condo so she can stop renting.
Looking for your opinions on him buying it and treating her as a tenant and getting the rental income vs her on the mortgage and not having to pay tax when it is eventially sold.
Any input is appreciated.
Thanks
Looking for your opinions on him buying it and treating her as a tenant and getting the rental income vs her on the mortgage and not having to pay tax when it is eventially sold.
Any input is appreciated.
Thanks
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Definately a tough decision.
Other factors to consider:
- in addition to the mortgage interest, the condo fees are also tax deductible, as are any maintenance costs.
- in the case that the property decreases in value by the time you sell, you wont pay any capital gains tax
- if it increases in value, you claim 1/2 that increase as income in the year you sell it. So your other income earned in that year will determine what rate this additional capital gain will be taxed at (your marginal rate). Thus another factor is how long you plan to hold the property. If you plan to hold it till retirement, the tax rate might not be as high as if you sold it while earning your lifetime maximum.
Also note that if your friend wants the tax deductions, I believe he must rent it to her at fair market value, and he must be earning a profit (or at least have an expectation to earn profit). It doesn't have to be a very high profit though.
Other factors to consider:
- in addition to the mortgage interest, the condo fees are also tax deductible, as are any maintenance costs.
- in the case that the property decreases in value by the time you sell, you wont pay any capital gains tax
- if it increases in value, you claim 1/2 that increase as income in the year you sell it. So your other income earned in that year will determine what rate this additional capital gain will be taxed at (your marginal rate). Thus another factor is how long you plan to hold the property. If you plan to hold it till retirement, the tax rate might not be as high as if you sold it while earning your lifetime maximum.
Also note that if your friend wants the tax deductions, I believe he must rent it to her at fair market value, and he must be earning a profit (or at least have an expectation to earn profit). It doesn't have to be a very high profit though.
Rental or principal residence?
Interesting question - because the Rental Income is from the Family Unit.
It would be useful to compare the two alternatives with a spreadsheet walking through the impact of each option on the Friend and Mom together as one Unit. As a family they want to minimize tax, cash outflows, and maximize return.
I agree with the other posts points - good ones.
It would be key to identify how long mom will stay in the condo and if son will want to rent it afterwards to another - and postpone the CG (assuming there are some). Or will he need to sell it to obtain cash flow for other life committments or investments.
Is a Fair Mkt Rent doable for mom's cashflow?
Given the requirement to have a small profit in a few years, the tax cost of that at son's marginal rates may quickly eliminate the benefits of a few years of loss writeoffs.
If mom takes the property as her principal residence and then on her death leaves it to her son - he would then have the benefit of the asset with a higher cost base from which to later calculate any CG.
Lots to consider!
Good luck.
Interesting question - because the Rental Income is from the Family Unit.
It would be useful to compare the two alternatives with a spreadsheet walking through the impact of each option on the Friend and Mom together as one Unit. As a family they want to minimize tax, cash outflows, and maximize return.
I agree with the other posts points - good ones.
It would be key to identify how long mom will stay in the condo and if son will want to rent it afterwards to another - and postpone the CG (assuming there are some). Or will he need to sell it to obtain cash flow for other life committments or investments.
Is a Fair Mkt Rent doable for mom's cashflow?
Given the requirement to have a small profit in a few years, the tax cost of that at son's marginal rates may quickly eliminate the benefits of a few years of loss writeoffs.
If mom takes the property as her principal residence and then on her death leaves it to her son - he would then have the benefit of the asset with a higher cost base from which to later calculate any CG.
Lots to consider!
Good luck.
At first I thought this was a difficult question requiring a spreadsheet analysis but then thought a little more. Others can correct me if I'm wrong. There are four ways to make money with rental real estate,
1. Mortgage principal paydown - this will be the same with both cases.
2. Property value appreciation - again this will be the same in both circumstances.
3. Positive cash flow - I would assume that if your friend is doing this to help his Mom he will be just charging her enough to cover expenses (mortgage, taxes, repairs etc). Therefore this would not be a positive cash flow property it would be cash flow neutral - therefore again the same with both cases.
4. Tax benefits - this is what the question boils down to ultimately. The potential write-offs against the rental property might sound tempting but you can only write-off expenses against your rental income not against your own salary. So in the case of a neutral cash flow you would not be making money by writing things off against the rental income. The principal residence however would allow this fellows mom upon sale to keep all the appreciation value without taxation vs selling and having had a neutral cash flow property now having to pay capital gains tax.
Good luck in your decision.
1. Mortgage principal paydown - this will be the same with both cases.
2. Property value appreciation - again this will be the same in both circumstances.
3. Positive cash flow - I would assume that if your friend is doing this to help his Mom he will be just charging her enough to cover expenses (mortgage, taxes, repairs etc). Therefore this would not be a positive cash flow property it would be cash flow neutral - therefore again the same with both cases.
4. Tax benefits - this is what the question boils down to ultimately. The potential write-offs against the rental property might sound tempting but you can only write-off expenses against your rental income not against your own salary. So in the case of a neutral cash flow you would not be making money by writing things off against the rental income. The principal residence however would allow this fellows mom upon sale to keep all the appreciation value without taxation vs selling and having had a neutral cash flow property now having to pay capital gains tax.
Good luck in your decision.
For tax purposes, your rental income and salary are just all combined as total income. You then apply whatever deductions you are eligible for, even if they happen to exceed the rental income portion.4. Tax benefits - this is what the question boils down to ultimately. The potential write-offs against the rental property might sound tempting but you can only write-off expenses against your rental income not against your own salary.
Yes, the son will just be breaking even (technically has to have a slight profit in order to claim tax deductions). But the son actually could save some money by using the rental property with a cash damming strategy.So in the case of a neutral cash flow you would not be making money by writing things off against the rental income.
Personnally, I would never rent to a family member (or friend). If payments could not be made (for whatever reason), how could you evict your own mother? I think mixing business and personal life like this is a bad idea.
I'm also in the same situation but the only difference is that I'm going to pay the mortgage for them either way. if ignore the taxation part when selling the place, can someone tell me the advantages and disadvantages relate to tax saving part on both option?( if I choose to rent to my parents, I will return their rent in cash), I do have another rental property in downtown.
Jane - If you return their rent in any form, cash or otherwise, you aren't really charging them rent. At least that's the way the CRA would see it. You would not get any legitimate tax deductions on your expenses. There is no advantage to renting it to them in this situation, only the disadvantage of having to pay capital gains tax when you sell it. Sure, you could try to hide the fact that you're giving their rent money back, and claim the tax deductions for the rental property, but that would considered tax evasion and you could go to jail if you get caught.
Thank you Elbyron,I was not thinking straight. now I"m thinking maybe I can use home line of credit and purchase a bigger property, so meanwhile I can let my parents live there for free, but also renting out other extra rooms.
Good question!A friend of mine is going to help his mother buy a condo so she can stop renting.
Looking for your opinions on him buying it and treating her as a tenant and getting the rental income vs her on the mortgage and not having to pay tax when it is eventially sold.
Any input is appreciated.
Thanks
I'll just respond to what I would do.
I would buy the condo and treat her as a tenant. The interest on the mortgage would reduce my taxable income since it is an investment and I can give my mother a decent rent rate. My mother would also be a very reliable tenant.
I would not sell the condo.
Thanks for your comments! I have advised of him of everything and I think he will give mom the down payment and it will be her place until she goes to the next chapter of her life such as assisted living.
I have advised of him of everything and I think he will give mom the down payment and it will be her place until she goes to the next chapter of her life such as assisted living.Good planning Shayne! Sorry to disagree with you Elbryon but you do not combine rental with salary income and then start making deductions. You first have to fill out tax form T776E (list gross rent - expenses (interest, maintenance etc) = net income. Net income minus capital cost allowances is then what you enter into Line 126 as part of your total income. Canada Revenue Agency will not let you enter a net loss for long (especially if you are renting to family). You have to demonstrate a reasonable expectation of profit to allow a net loss that then can be deducted from regular salaried income. So again I will stand behind what I originally posted, no benefit to be renting to her. Certainly when she is ready to sell having the advantage of no capital gains to pay will be worth it. Good luck to your friend!
iamphysio, you are correct about the order, but the end result is that the net income from the T776E is added in with your salary - that's all I meant. Rental expenses are recorded on the T776E, while other deductions go other places, but in the end you basically pay tax on the total income minus deductions.
I agree that it's better that the mother owns the house. But, I also believe that (in general) you can still save on your taxes in a break-even rental situation, by using a cash dam to effectively convert your primary residence mortgage into a tax-deductible line of credit.
I agree that it's better that the mother owns the house. But, I also believe that (in general) you can still save on your taxes in a break-even rental situation, by using a cash dam to effectively convert your primary residence mortgage into a tax-deductible line of credit.
1 - 14 of 14 Posts
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