Mortgage rates and tax write offs.

[blankall]

Considering buying a condo for rent. Let's say I earn $1000/month in rental income. I pay $100 for insurance and $150 for condo fees.

I have the option to go with a 30 or 25 year mortgate. The former will cost me 900/month, which will result in a 150/month loss. The latter will cost me 750/month which will allow me to break even.

Can I write off the 150/month loss if I go with the shorter mortgate term?

All help is greatly appreciated.

[Travis Munroe]

You can write all sorts of things off including losses.
You are best to consult with an accountant for detailed information.
Based on what you said, I would go with the 25 year mortgage! (consult a mortgage broker)

[lucky1]

from what I was told, it may be best to go for the longest mortgage possible (for a revenue property) as you can write off the interest....it wouldnt make to much sense to have a lower term if the rent charged does not cover the carrying costs for the property

[Travis Munroe]

I shouldnt have said I would go with the 25 as the only real person to know is a mortgage broker who has all the specifics.

[cal_guy]

Remember you can only claim the interest portion of the mortgage as an expense not the principal portion. Also you can claim those fees and insurance as an expense. If your not familiar with such terms as Capital Cost Allowance or Half Year rule I would highly suggest you consult with an accountant first.

[Frequitude]

I'm not an accountant, but this is what I believe you can claim:

-Interest component of mortgage (so go with 30 year for higher monthly cash flow, 25 year to build equity faster)
-Condo fees
-Interest
-Depreciation (CCA) if you commit to selling it one day as a revenue property (i.e. pay capital gains if there are any)
-uhhh, property taxes?!? (forget)
-other general expenses and maintenance


Depreciation is the lesser known one. I didn't realize that until this year after 3 years of renting, so I should be getting a decent return once I go claw it back.

[Oil Stain]

Originally Posted by blankall

Considering buying a condo for rent. Let's say I earn $1000/month in rental income. I pay $100 for insurance and $150 for condo fees.

I have the option to go with a 30 or 25 year mortgate. The former will cost me 900/month, which will result in a 150/month loss. The latter will cost me 750/month which will allow me to break even.

Can I write off the 150/month loss if I go with the shorter mortgate term?

All help is greatly appreciated.

What is your interest rate for your models?

You could be looking at 5-6% or more when it comes time to renew your mortgage and you could end up with with bigger losses to cover then anticipated. If you are using 2-3% like many of today's variable mortgages I'd bet heavily against it holding out that way for 5 years.

Also, what is your level of risk tolerance concerning the potential burst of the housing bubble?

I am looking into a rental property myself, but am thinking of holding off for a year or two to see if the prices start to drop. I'd probably kick myself for years if I bought in right before housing shed 10-20% of its market value. If you intend to hold the property for 15-20 years you may not be bothered with trying to time the market, and be able to look past a short term loss more easily.

[bizaro86]

Originally Posted by Frequitude

-Depreciation (CCA) if you commit to selling it one day as a revenue property (i.e. pay capital gains if there are any)
-uhhh, property taxes?!? (forget)
-other general expenses and maintenance


Depreciation is the lesser known one. I didn't realize that until this year after 3 years of renting, so I should be getting a decent return once I go claw it back.

You can only claim depreciation if you have a positive rental income, depreciation cannot be used to create or increase a loss on a rental property. So in this case, if he's already losing 150 a month, he probably will have a loss. (Granted mortgagep principal isn't tax deductible, but it's doubtful that is 150 a month initially.)

Property taxes are deductible on your statement of rental income.

Maintenance is deductible, but you have to be a bit careful with that one, since some things that you might consider maintenance the CRA considers as a capital improvement to the property. Direct replacements of things that have worn out are ok, but if you are upgrading to a "better" version, then its a capital expenditure that you have to put it into the correct CCA class and claim it over time.

[Frequitude]

Originally Posted by bizaro86

You can only claim depreciation if you have a positive rental income, depreciation cannot be used to create or increase a loss on a rental property. So in this case, if he's already losing 150 a month, he probably will have a loss. (Granted mortgagep principal isn't tax deductible, but it's doubtful that is 150 a month initially.)

Property taxes are deductible on your statement of rental income.

Maintenance is deductible, but you have to be a bit careful with that one, since some things that you might consider maintenance the CRA considers as a capital improvement to the property. Direct replacements of things that have worn out are ok, but if you are upgrading to a "better" version, then its a capital expenditure that you have to put it into the correct CCA class and claim it over time.

Ahhh, very cool. Depreciation can only bring you to "net zero" hey? What if, say, I made rental income the last 2 years but none this year. Could I go back and apply the depreciation to the past (noting that I forgot to claim it these past couple years)?

[bizaro86]

Originally Posted by Frequitude

Ahhh, very cool. Depreciation can only bring you to "net zero" hey? What if, say, I made rental income the last 2 years but none this year. Could I go back and apply the depreciation to the past (noting that I forgot to claim it these past couple years)?

*I THINK* (noting that I'm not an accountant) that you can actually re-file your taxes for a prior year, and change stuff like that. So if you paid taxes on rental income but forgot to deduct depreciation, I believe you can re-file the taxes with that corrected, and get a refund. I've never personally done that, so please do adequate research.

[firebug]

Originally Posted by blankall

Considering buying a condo for rent. Let's say I earn $1000/month in rental income. I pay $100 for insurance and $150 for condo fees.

I have the option to go with a 30 or 25 year mortgate. The former will cost me 900/month, which will result in a 150/month loss. The latter will cost me 750/month which will allow me to break even.

Can I write off the 150/month loss if I go with the shorter mortgate term?

All help is greatly appreciated.

You seem to be getting your accounting terms confused.

My understanding of your situation (very simplified, consult your own accountant):
Revenue:

Rent $1,000/ Month

Expenses:

Insurance $100/month
Condo Fees $150/month
Interest ~450/month (Lets assume it is about half of your mortgage payment)
Depreciation $0 (Talk to your accountant so I will assume $0)
Property Taxes $? (Not sure if this is include in your mortgage)

Income:

Revenue - Expenses= $1,000 - $700
=$300 (you would pay taxes on this amount)

You seem to have confused Revenue with Income, and Income with Cash Flow. Your taxes (and write-off) are not determined by your monthly cash flow, but by your annual income.

You should also be factoring in your cost of capital (alternative return on the value of your downpayment), as well as the fact that with historically high rental rates and historically low interest rates you look to have negative or marginal monthly cash flow - not a good situation.