Realty Bites

Special Feature with Harpreet Wadehra from Soberman LLP

Ever wondered if you should invest in real estate? We caught up with Harpreet Wadehra, a manager in the Assurance & Advisory Group at Soberman LLP who has been working in public accounting since 2005 and is active in all aspects of the firm’s assurance and advisory practice. Here are some great tips she shared with Women’s Post…

What are the benefits to investing in real estate?
The real estate market has proven to provide steady returns, especially for those wanting long-term returns. Based on the overall price of many types of real estate in the Canadian market over the last 10 years, prices have surged.

Investing in real estate provides good financial and operating leverage. Unlike other forms of investment, real estate costs are generally fixed (such as insurance costs, mortgage interest). Once fixed costs are covered by rents, increases in rents generate large increases in profits.

This implies that if an investor prepares accurate month-to-month cash flows, predicting incoming revenues and outgoing expenses can be relatively simple. The property can pay for itself, providing great yields for the investor.

How does real estate affect your taxes?
Even if prices do not increase drastically, investing in real estate has two immediate benefits. First, interest paid on the mortgage or line of credit is fully tax deductible. Second, an investor can deduct depreciation expense, thereby increasing cash flow by reducing tax payments. One can show a loss on their real estate (with expenses such as depreciation), and use that loss to reduce personal income, thus lowering their taxes (assuming an individual owns the real estate personally and not via a corporation). Before deciding on the structure of the investment (individually or via corporation/trust), it’s imperative to obtain professional advice as exposure to risks and liability differs under each structure.

What are the tax consequences of the sale of a cottage and what other issues are there to consider?
The sale of a cottage attracts tax on the capital gain at the highest marginal tax rate. However, Canadian tax rules allow a property in which the taxpayer resides to claim a “principal residence” exemption, which basically allows a taxpayer to avoid the tax on the sale for the period the taxpayer resided in the property. However, an individual can only designate one property at a time as their principal residence.

The capital gains tax system in Canada was introduced in 1972; increases in value up to that date are not taxable but you need to know the market value (the “v-day” value) on that date. So, if the cottage has increased in value after 1972 by more than a second property owned, it may be beneficial to claim the cottage as the principal private residence for the period. Due to the complexity of the rules for the principal residence designation, it is recommended that you have your tax advisor compute and evaluate the different scenarios available to you.

What are some of the traps and pitfalls of investing in real estate south of the border?
It’s imperative to research and study the market you’re thinking of investing in. The real estate market in the United States is different from that in Canada, mostly it is exposed to a lot more severe market swings. Without having proper advice and consultation, a Canadian investor may find herself trapped as she tries to purchase and/or sell property. Many markets in the United States are monopolies that have access to all the best deals and the typical investor is not seen as welcome competition. Movements in the exchange rate may have a significant effect on income and the gain that is ultimately realized.

Another major hurdle is setting up to avoid issues such as double taxation, and withholding taxes. As a Canadian, a taxpayer is taxed on her worldwide income, which would include any rental income and gains on sale of properties outside of Canada.

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