In Toronto real estate investing, the aim is to make as much profit as possible while paying as little tax as you can, so you end up with more money in your pocket.
Since Canadian taxes can be high, knowing how they affect your Toronto real estate investments is crucial for maximizing your profits.
Real estate is a great investment choice for many reasons. It offers low borrowing rates, the chance to borrow money to increase your investment, and some nice tax benefits.
Let’s go over the three main tax advantages that benefit Toronto real estate investors!
Disclaimer: We are not accountants. Before making any investment decisions based on the tax information provided in this video, we strongly advise consulting with your accountant to ensure it aligns with your specific financial situation and objectives.
Maximizing Returns through Refinancing
Imagine buying a property in Toronto for $1.1 million and spending $200,000 on renovations, bringing the total to $1.3 million. Once the renovations are done, the property’s value jumps to $1.5 million, giving you a $200,000 profit.
Now, if you’re thinking of flipping it, your only choice is to sell. But after paying $85,000 in selling fees and $100,000 in income taxes (because flips are taxed like regular income), your profit might not be as impressive as you hoped.
That’s why many Toronto real estate investors prefer holding onto the property and refinancing it instead.
Here’s the deal: the difference between what you paid and the new value is $400,000. By refinancing, you could pull out 80% of that difference, which equals $320,000 in cash.
Sure, both flipping and refinancing come with risks, especially if the market takes a hit. But by renting out the property instead of flipping it, you get more stability.
Even if refinancing doesn’t go as planned, having a long-term strategy means Toronto real estate investors can wait for the market to bounce back and maximize your investment in the long run.
Using Capital Cost Allowance To Defer Real Estate Income Taxes
When you earn money from investments, like real estate in Canada, you usually have to pay taxes on that income.
But for real estate investors in Canada, you have more options to defer income taxes paid on your investment properties.
You can depreciate and deduct a portion of the property’s building value each year as an expense. This deduction is called Capital Cost Allowance (CCA).
When you do sell, the CCA you deducted over the years gets added back to your income for that year. This means the income tax saved from CCA deductions is still payable – you just don’t have to pay taxes on this income until you sell the property.
By using this deduction method, Toronto real estate investors delay paying taxes, which leaves you with strong cash flows each month and more money to invest when you’re holding the investment property.
Ultimately, this tax deferral strategy puts more money in Toronto real estate investors’ pockets.
real Estate Capital Gains Tax Exemptions
Owning your main home in Canada has a big perk—you won’t owe any capital gains tax when you sell it.
Many Toronto real estate investors know about this tax break if the property was their primary residence. If you occupy a portion of the home as your primary residence, that portion will be exempt from capital gains tax.
But what’s less known is that if you use a small part of your home for rental or business purposes, you may still get the full tax break under these conditions:
- The rental or business part is small compared to your main living area.
- You don’t change the property’s structure to make it better for renting or business.
- You don’t claim any tax deductions for the part you’re using for rental or business.
Newer Toronto real estate investors might not realize how valuable this is, as they’re more focused on cash flows. But reducing capital gains tax is a big deal, especially since a lot of the gains from Toronto real estate come from property value going up over time.
For example, if a $1 million property in Toronto goes up by 5% each year for 10 years, that’s over $600,000 in profit.
Without the capital gains tax break, you could owe $125,000 in taxes. If it’s your main home, you save that $125,000!
How We Can Help
If you’re looking to maximize your returns and minimize tax implications with new Toronto real estate investments, our team is here to find the best one for you!
We’re not your typical real estate sales brokerage. Instead, we focus on using numbers to make better real estate investing decisions in Toronto.
That can mean looking for stronger investments with positive cash flow, thinking about risk management, and looking for ways to boost returns like value-add renovations and gentrifying areas.
If you want to discuss your private real estate situation with us, just go to this link below to set up a time to chat!
