- It’s much more common for realtors working in metro areas to have return clients who are investors in the market, and that’s of course no surprise given how investing in the real estate market can produce nice returns given the way properties in places like Vancouver and Toronto almost always appreciate in value and then sell for over asking price once they’re reintroduced to the market. You’ve got to have fairly deep pockets to be an investor in these markets, and those that do become quite valuable clients for the realtors that serve them.
One of the realities of home ownership in Canada, however, is that municipal governments lean heavily on property ownership as a means of squeezing taxes out of those individuals. Whether those funds are spent with a degree of propriety and to the greater benefit of the communities is another question, but one thing we can say for certain is that there’s no avoiding the taxman when you’re a home owner, and property taxes on the land the homes are built on are always going to increase.
Now looking at it from the realtor’s perspective, investor clients who can afford multiple properties in desirable city locations are obviously the exact type of clients they’d want to be working with as often as possible. But what you’ll find – and again not surprisingly – is the biggest investors will be choosing to work with well established and well renowned realtors who have made a name for themselves in that city.
It takes time – and a lot of listings sold – in order to become one of those individuals and that’s why our online real estate lead generation system here at Real Estate Leads is such an excellent choice for realtors who want to make a name for themselves in this way and to start by being put directly in touch with buyers and sellers who are genuinely considering making a move in the local real estate market sometime in the near future.
Being in the know about the industry and how investors can work within it is also going to be very beneficial for realtors who are looking to establish themselves as true experts and ones worthy of the bigger name clients and the like. With that understood, here are tips you can share with investor clients that can allow them to pay less taxes on their investment properties.
Less is Preferable
Taxes can always potentially cut into the profits on any investment and in real estate those cuts can be large and prohibitive. Investors who come to understand the complexities of the modern tax landscape can enjoy significant tax savings. Here are two tax strategies that can be used by Canadian investors.
Strategy 1 – Create a Tax Deductible Portion of the Mortgage
This first strategy involves making part of the client’s mortgage tax deductible. Investors in Canada are allowed to transfer the proceeds from a home mortgage loan over to a loan used to buy a rental property, and that loan is then tax deductible.
So if they were, for example, to purchase an investment property for $500,000 with a mortgage for $400,000 in year one. Then when that investment property’s market value has increased and the mortgage is paid down the property could be refinanced, or sold. We will then assume that in year 5 the investment property is sold for $600,000 and a total profit of $100,000 plus the proceeds of paying down in the mortgage for another $35,000. Then after fees and capital gains tax are paid, $90,000 is realized from the sale. These funds could then be directed to paying down the mortgage on your principal residence. If that mortgage is set up to allow a re-advance, the $90,000 can then be earmarked for re-investment. So with the interest on the $90,000 portion of the home mortgage being tax deductible it could be used to purchase the investment.
By having your client arrange their investments this way they’d create no additional risk and it would start to save taxes, the funds of which could be directed to further paying down the home mortgage or investing elsewhere depending on their prerogatives.
Strategy 2 – Enabling investors to reduce taxes by setting up a Company or Family Trust
While it’s natural to aim to take advantage of all of the best tax planning strategies available, there is nearly always a minimum level of income or asset base that is required before the accounting and legal cost of setting up those planning options become worth the tax savings.
This is where you can make them aware of the of the ‘Section 85’ roll over. What this is is a tax deferred roll over in Section 85.1 of the Tax Act which allows a Canadian to transfer real estate holdings and other kinds of investments into a company while not paying any recapture or capital gains tax at that time. For a family aiming to grow their investment holdings and managing those assets for the next generation, what the section 85 roll over allows for is deferring taxes at the outset. When this opportunity is taken advantage of it can allow a family trust to be created.
This trust can then be used for long-term management of the ownership of the new holding company. The last thing we’ll add in regards to this is that investors should seek professional advice from a CPA (Chartered Professional Accountant) or tax lawyer before beginning into real estate investors tax strategies of any sort.
Sign up for Real Estate Leads here and receive a monthly quota of qualified buyer and / or seller leads that are delivered to you exclusively for the region of any city or town in Canada where you’re working as a real estate agent. You’ll be the only realtor who receives these leads, and what that means is you have the first crack and convincing these genuine prospective clients that you’re a good choice to be providing them with professional guidance as they either buy or sell a home.