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REAL ESTATE INVESTING AND TAX Presented by and Smart Home Choice.

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Presentation on theme: "REAL ESTATE INVESTING AND TAX Presented by and Smart Home Choice."— Presentation transcript:

1 REAL ESTATE INVESTING AND TAX Presented by and Smart Home Choice

2 Agenda 1. Introduction 2. Calculating Net Rental Income 3. Financial Tips 4. Q & A Session

3 Introduction Purpose of this seminar: Material is relevant to anyone who wants to actively invest in real estate Help familiarize yourselves with BASIC taxation as it applies to real-estate investing Illustrate how to ORGANIZE your data for your accountant Understand the common financial pitfalls that some novice investors make

4 Introduction Campanella McDonald LLP 2 Partner firm Concentration on: Small to Mid-Sized Businesses Self-Employed/Commissioned workers Active Investors with mid to high value portfolios Goal: To pro-actively assist clients with Accounting Taxation Financial Advisory

5 Introduction Fabio Campanella, CPA, CA, CFP, CIM BA – York University CA – Ontario CFP and CIM Started in 2002 Work history: Price Waterhouse Coopers – Audit, Tax, Corporate Finance Harmonic Fund Services – Hedge Fund Controller/Consultant BMO Nesbitt Burns – Investment/Insurance Advisor CGA Canada/Seneca College – Corporate Finance Instructor Columnist for the Financial Post

6 Calculating Net Rental Income There is a big difference between: Net Accounting Income, Net Taxable Income, Net Cash Flow In this seminar we will concentrate on calculating “NET TAXABLE INCOME” and showing it’s effects on Cash Flow

7 Calculating Net Rental Income Net Taxable Income Based on adjusting accounting income Application of Income Tax rules/laws/standards Affects final accounting and cash flow numbers The basic equation is: Add: all forms of taxable revenues Deduct: all forms of allowable expenditures

8 Calculating Net Rental Income Step 1: Identify Revenues There are three main types of revenue 1. Rental Revenue 2. Recapture of CCA 3. Capital Gain # 1 and # 2 are subject to full taxation # 3 subject to ½ taxation

9 Calculating Net Rental Income Step 1: Identify Revenues Typical “rent to own” structure has several cash flows: Cash FlowTax Treatment Option Premium (down payment) Rent Revenue Rental PaymentsRent Revenue Option Premiums (monthly)Rent Revenue Sale Price of HomeCap Gain and/or Recapture

10 Calculating Net Rental Income Step 2: Identify Allowable Expenditures The general “rule” is that any expenditure used to generate revenue from your investment can be considered “allowable” There are certain exceptions Amounts spent to “setup” your property Amounts spent to “improve” your property Amounts spent to obtain financing for your property

11 Calculating Net Rental Income Cash OutflowsTax Treatment Purchase Price of HomeCapitalize Legal FeesCapitalize Land Transfer TaxCapitalize CMHC InsuranceOther Consulting FeesCapitalize Mortgage Principal RepaymentsNone Mortgage Intrest PaymentsExpense Operating Expenses (incl. repairs)Expense Improvements/renovationsCapitalize Payback of Option PremiumReduction of Sale Price

12 Calculating Net Rental Income Let’s look at a typical 3-year “rent-to-own” deal. 1. First, we will calculate the purchase price and establish the mortgage 2. Second we’ll calculate the taxable income and tax liability for a 3 year rental period 3. Third we will calculate the eventual sale price and related tax consequences 4. Fourth we will look at the cash flow from purchase to sale

13 Calculating Net Rental Income




17 Financial Tips 1. Project and adequately manage your cash- flows 2. Keep an emergency reserve 3. Keep adequate records and documentation on tax deductible expenses 4. File your taxes early, properly, and use a professional 5. Understand how your investments will affect your estate

18 Q & A Session Smart Home Choice Inc.

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