Tuesday, April 21, 2015

How to turn your mortgage into a tax advantage

Unlike our neighbours to the south, mortgage interest on a principal residence in Canada is not tax deductible, well, at least not without some elaborate tax planning.

With some careful structuring, Canadians can actually take advantage of preferential interest rates available to them by leveraging their homes, while at the same time obtaining a tax advantage.

It’s important, however, to avoid the many tax pitfalls inherent in this sort of strategy. Below are a few of them.

The right and wrong way to deduct mortgage interest on a rental property

Many investors believe that it’s a straightforward equation: take a mortgage on your rental property then claim the mortgage interest as a deduction against the rental revenue.

A common misunderstanding is that securing the mortgage to an investment property is the precondition allowing the interest deduction. Nothing could be further from the truth. It is not the asset used to secure the loan, but rather the use of the money borrowed which enables a taxpayer to take a deduction on the interest paid.

For example, say you were to re-finance your rental property, then take the extra money to put a downpayment on a new cottage (for personal use). The additional interest associated with the inflated mortgage would not be tax deductible because the money was used to purchase an asset for personal use. If the additional financing were used to repair, maintain, or improve the actual rental property then the argument for deduction would exist.

The right and wrong way to take a mortgage on a personal home to invest

Many homeowners attempt the “Smith Manoeuvre”– the name of an investment strategy coined by financial author Fraser Smith – whereby an individual secures a loan, such as a Home Equity Line of Credit, against the equity of their house, then uses the additional funds to finance a variety of investments. One must carefully monitor the structures of these investments to ensure that the interest is indeed tax-deductible.

One of the conditions is that the investments must at least have the potential to pay income as opposed to only exempt income or capital gains. A stock trading on a major exchange can produce both a dividend and a potential capital gain much in the same manner that a rental property can produce both a stream of rental income and a capital gain on sale.

Gold bullion, on the other hand, will never pay interest, dividends or rent, and under normal circumstances will only produce a capital gain for tax purposes. Therefore, a leveraged investment in pure gold (or silver, or nickel for that matter) would not normally qualify you to deduct your interest.

The right and wrong way to reshuffle your finances

It’s wise to take a financial snapshot of your assets and liabilities to see if tax planning opportunities exist. In many cases families can make a simple shuffle in their finances to re-organize tax-inefficient debt into tax-efficient mortgages.

A classic example would be a family with a sizable investment portfolio outside of an RRSP and a mortgaged family cottage. The investment portfolio pays dividends and interest both attracting tax, whereas the interest payments on the personal-use cottage provides no tax benefits whatsoever. Instead the family should have liquidated their portfolio, bought the cottage, then refinanced and invested in a new portfolio.

If structured properly, the once tax-inefficient mortgage becomes a tax-efficient investment loan – all the while leaving the family in the same net financial position.

Wednesday, April 8, 2015

5 Ways Home Sellers Can Prepare for the Spring Market

With spring being the busiest time for real estate, homeowners planning to put their homes on the market shouldn’t wait for flowers to bloom before getting ready to sell. Having a few months to prepare can make for a much smoother selling experience.

If you’re a prospective home seller, here are five things you can do now to get ready for a spring sale:

Start Packing

It may sound crazy to start packing months in advance of your move, but since you’ll eventually need to do this anyway, you might as well get organized now. We’re not suggesting you pack up your kitchen and eat off paper plates, but you can sort through your storage closets, attic, basement or garage to determine what you want to keep, what to give away and what to sell. Boxing up items will make your space look larger and neater when it’s time to show your home. You can also get an idea of whether you need to rent a storage facility while your home is on the market.

Clear Away the Clutter

If you visit model homes or open houses of homes that have been staged, you’ll never see a stack of unread magazines, children’s artwork loosely hanging on the refrigerator, or a cluster of unpaid bills on a table. While everyone has clutter, buyers want to see a fantasy version of your house, in which they can envision living. Once your home is on the market you’ll need to keep it as neat as possible. One way to make that easier is to reduce the amount of clutter you have on your shelves and surfaces. Put away items that are regularly on your kitchen sink and pack away the family photos that gather dust.

Improve Your Home

While you don’t necessarily want to do a major, expensive renovation project before you sell, you can make minor repairs and improvements that will make your home look fresher to buyers. Try things such as replacing the caulk and grout in your bathroom, updating old or rusted ceiling fans and light fixtures, and changing switch plates, doorknobs and other hardware for a clean and neat appearance. Consider painting your front door and trim even if your rooms don’t need new paint.

Hire the Right REALTOR®

Your choice of a listing agent will make a big difference in how quickly your home sells and how much of a profit you’ll realize. If you are looking to sell I'll be happy to meet with you  provide a detailed market analysis for similar homes in your price range and area. As Your REALTOR® I will make sure that your property gets maximum market exposure and sells for top dollar.

Research Your Market

If you plan to buy another home, an important decision to make is whether to sell your home first or make an offer on a new home before putting yours on the market. A knowledgeable REALTOR® can help you evaluate how fast homes are selling in your market and help you estimate how long it will take you to find a home. This decision also depends on your financing, so you may want to consult with a lender to see how you can finance the transition from one home to another if you choose not to sell your home first.

If you spend the winter months preparing for spring, you’ll find yourself ready to move fast when buyers come out of hibernation.

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