Investment property ownership
How you own an investment property will have considerable impact on the many different choices you make. You can either be a sole proprietorship or a corporation. Some of the main benefits and disadvantages include:
- Personally, responsible for all assets and liabilities
- Offers no protection for your personal assets.
- Lower tax rates
- Normally can-do you owner accounting/bookkeeping and taxes
- Offer limited liability and protect your other assets.
- Do have to worry about double taxation.
- More control over spreading out your income
- Taxes and bookkeeping often require assistance from a professional
Should you incorporate and, when would you?
It is a personal choice, depending on your tax bracket, risk aversion. Taxes rates also do vary depending on how you set up your corporation. Opening a corporation does involve a minimum investment staring at $200.
What are the biggest problems that small landlord has with bookkeeping?
Keeping receipts! People do not keep receipts, the CRA likes to see the proof on what you paid for and will not accept a credit card statement. This is important that you keep them and have a filing system.
What is a Capital expenses vs a current expense?
Capital expenses are improvements to your property that last longer than a year, add value to the property, and are not to be included in your yearly expenses and need to be tracked separately. Stucco, changing windows, major renovations are all great example of a capital expense.
Current expenses are normal maintenance items that tend to happen every yearly and do not lead to a major increase in the value of the property. Painting, repairs, minor leak fixes are all examples of current yearly expenses.
Depreciation, how does this work with real estate?
A building depreciates and does not, the value of the purchase is normally split 80% land 20% building of your purchase and sale. You can depreciate a building to lower your yearly taxable income, however when you sell a property you need to recapture the depreciation rate and then be taxed at a higher rate. It really is a short-term gain for a long-term pain.
Bonus Topic Capital gains
No one likes them, everyone must deal with them, what do we need to know? Your personally residence is exempt from capital gains. Any property you are not living in or is held by a corporation has no exception and taxes are paid on 50% of gains (increase in value).
Turning your primary residence into a rental property
When someone decides to move out and rent their home what is the best way to capture value the day you make a change from personal to rental. You should get the property appraised and the CRA has a form used to calculate the different tax rates depending on the length you lived in the property and how long it was rented for.
Tax and accounting information, it often difficult and complex to understand, so using an expert is always advised. If you want to connect with our expert reach out to Yasemin at: https://www.bookkeepingbizz.com/ (647) 866-0733 firstname.lastname@example.org
Cautionary tale from the trenches
The Canada Revenue Agency looking and tracking owner who do not claim rents by not offering receipts, this is not advised as you will have to not only pay the tax but also a penalty. When your tenants files their taxes they list who the landlord is on a tax return. Avoid being the next panama papers and honestly is the best policy.