With the uncertainty in the stock market many individuals are turning their investment focus to the real estate market. Investment in the real estate market can be facilitated by purchasing either for your own use or for rental property.
Your principal residence Under Canadian Income Tax law any gain in the value of your principal residence is not subject to tax. More expensive homes with some sort of uniqueness such as location or design appreciate faster than the average home. As such to maximize your net worth it makes sense to purchase the most expensive home you can afford. Even if you have a mortgage the increase in your equity is greater than it would be with a less expensive mortgage free home.
Rental Properties When you have maximized your principal residence your investment in real estate requires the purchase of a rental property. The gain in value of a rental property will be subject to Capital Gains Tax but only one half of the gain is taxable. Each year you will have to complete a profit and loss statement for the rental property. The income from rent will be offset by expenses such as mortgage interest, realty taxes, utilities etc and the net profit or loss will be included on the owners personal income tax return.
New vs Resale Investment Real Estate When looking for a rental property it is necessary to decide between a new or a resale property. The resale property will be in a more established area and grass and fencing will likely be in place. The resale property could, however, have problems with maintenance issuers such as the roof or heating system. It is important you have the property inspected prior to closing and be prepared to budget for maintenance issues.
A new house is not going to have maintenance issues but it is sometimes more difficult to find a tenant for a house located in a sea of mud.
HST treatment of new homes. All new homes in Ontario are subject to HST. On all new home offers there is a rebate of HST that is assigned to the builder. This rebate only applies if the purchaser is purchasing for his own use so if you are purchasing for investment you will have to pay this rebate in addition to the purchase price to the builder on closing. The HST Rebate is made up of 2 components. The Federal part of the rebate is 36% of the 5% Federal portion on homes valued at $350,000.00 or below and the rebate decreases until there is no rebate on homes over $450,000.00. The Federal portion of the rebate on a home valued at $350,000.00 is $6,300.00. There is also a Provincial portion of the rebate. This is calculated at 6% of the purchase price up to a maximum of $400,000.00. On houses costing more than $400,000.00 the rebate is capped at $24,000.00. On our $350,000.00 example the Provincial component of the rebate is $21,000.00 which means the total of the Federal and Provincial portions of the rebate is $27,300.00. You must pay this additional amount on closing but if you are renting the property for at least 1 year you can apply to recover the rebate. The application process is simple but you may need to wait several months to receive the rebate.
Financing the Investment purchase Most financial institutions will permit the investor to mortgage 80% of the purchase price without any high ratio fees. It is possible to finance the balance of the purchase price by using a secured line of credit on your principal residence. It is important that you discuss this option with your accountant in order to maintain the income tax deductibility of the interest on the line of credit.