Taxes Advantages of Real Estate

In Canada, we would assert it is the same for everyone. So if you can reduce that expense via real estate and create an investment at the same time, you should definitely do so. First, a quick disclaimer. This episode is for informational purposes only and should not

be considered tax advice. The insights shared are based on our personal experiences and may not suit everyone’s situation. We strongly encourage you to consult a qualified tax professional before making any financial decisions. So the first one we wanna chat about is your personal resident mortgage because most people are homeowners and they have a mortgage and their goal is to pay it down and be mortgage free. But as we’ve discussed in other episodes,

There are things you can do with that mortgage that will create an asset and passive income for you instead of just sitting on something that is considered a liability.

Brian Persson (01:46.412)
Yeah. And it’s considered a liability because you’re paying for it with after tax dollars. your renters are not paying for it. No one else is paying for that mortgage for you. So how do you turn your personal residence, your mortgage on your personal residence from a liability to an asset? Well, in Canada, the tax law allows you to borrow money and

put it into an investment which has the likelihood of creating cashflow. And when you borrow that money, you can write off the interest of what you’ve borrowed. So if you borrow money from your personal residence, i.e. your mortgage, then you can write off the interest of that mortgage when you invest it. So for us, we chose one of the simpler strategies just to keep our life simple.

And that is we, every once in a while, when the mortgage gets paid down enough, we will borrow a lump sum of money from our mortgage and we will put it into an investment. And that way we have a single transaction. have one borrowed chunk of money and we have one invested chunk of money. And it is very, very easy to keep that paper trail clean for the revenue agency. And if an audit comes our way, we have no problem with it.

Right, so we, just to maybe dig just a little bit deeper, we obviously have a house and a mortgage that we had originally anticipated paying down. We’ve shared this multiple times that we were, I think one, maybe two months shy of being mortgage free. Well, we decided we want to refinance. We’re going to pull money out and buy another property or two in this case. And so we pulled it out. We did a HELOC, so a home equity line of credit.

and we pulled a lump sum and bought a property. And like you said, keep the paper trails clear. And then we were able to write off the interest against the lump sum we borrowed. So anything that was still owing on our personal property, that was no write off. We still have mortgage payments for our personal portion of the property. the borrowed portion for an investment, to be clear, you can’t borrow it and go buy a car. That’s not not CRA improvement.

Brian Persson (04:04.738)
Yeah, exactly. You said it. You said it exact. The only the portion that you’ve borrowed from your personal residence can be written off. The interest can be written off. And that’s why you have to have a very, very clean paper trail because if the Canadian revenue agency comes in and audits you and they can’t tell the difference between what you’re paying personally and what you’ve borrowed, then you might be in some tax trouble.

And that’s why we like this strategy is because it’s just a very, very simple, clean paper trail. it also just happens to work really well with private equity, which we like to invest into, because more often than not, need larger, larger lump sums of money. can’t just put $500 into private equity. but, because you need the larger amounts, it works really well to just let it build up, take that amount, put it into a single investment.

Yeah, we love this strategy. We’ve used it over and over on multiple properties. It’s a fantastic way to get into bigger investments and to just start building your wealth for retirement or whatever that looks like because not everyone can put away a lot, but if you’re almost mortgage free or have a big chunk of equity, you can pull that out now. Think about that. You’re borrowing money from the bank to buy an investment for your future.

instead of sitting on a, and you’re still in the house that you own and love. It’s a win-win, people.

Yeah, one of the biggest mental hurdles for people in with the strategy in general is that they, don’t want to pay any more on their mortgage than they have to. But if you can imagine this, if you’re generating, say your mortgage, mortgage rates nowadays are around 4%, but your investment can make 7 % while you now are clearing 3 % total on top of your total, like what you’ve invested. Plus the interest.

Brian Persson (06:04.558)
that you are paying that 4 % of interest that you have to pay against your personal residence is tax deductible. So if you’re in a nominal tax bracket of 30 to 40%, well, that interest gets deducted by whatever amount of interest you paid per year against 30 or 40 % of your personal tax. And so you’ve saved money on your personal taxes and you’ve gained a 3 %

interest advantage on your investment. So it’s win-win everywhere, but the hurdle is that you do have to pay interest on your personal residence now. And that’s sometimes a little bit too much for people to handle and it might not be the right strategy for you if you can’t get your head around that.

Yeah, but it’s a great way to force yourself into saving, investing, and building your wealth. It counts, yeah. Definitely something to look into. Something else we do ourselves and talk about is what we call return of capital.

Yeah. Again, consult your tax professional because return on capital can get complex, but as very, very simplest explanation, you basically are putting money into an investment, which is then treated as if that money was lent to the investment and not necessarily invested. So when you lend money, that money is then returned to you. So you, the borrower gives it back.

That’s a highly, highly over simplistic explanation of it, but there’s two sort of simple ways that you can go about it. If anyone out there has a corporation, they’ll know that if they give money to their corporation, say they give $10,000 to their corporation, if that corporation gives them money back, that is called a shareholder loan. It comes back to the person and it’s basically considered a return of capital. You do not get taxed on the return of that $10,000.

Brian Persson (08:03.99)
For structures like a real estate investment trust, they also have something similar built into it. So your investment into that real estate investment trust, that REIT, is in a portion of it. You have to check the REIT and consult with your investment professional on this, but a portion of it is often a return of capital and the interest that you earn on your investment is actually not taxable. So you can save tax on the growth of your investment.

Right. And I want to share what I think is a little bit of a simple example to make it easier for our audience. If I personally bought a piece of real estate for, let’s say 500,000, and I made, say, 50,000 a year on that, well, I’m taxed. I’m taxed whatever my tax rate is, which if I’m making other income, like you said, it’s 30 to 40 % on that 50,000. So then I am only actually taking home a portion of that 50,000. But if I put…

500, that same 500,000 instead into my corporation. My corporation bought that real estate and then my corporation is making the 50,000 and paying me the 50, zero tax because I put that money in. it’s considered, like you said, a shareholder loan and I’m getting 50,000 tax free out every year for the next 10 years or until my 500,000 is paid back.

Correct, yeah. And with the real estate investment trust, it works very, very similar. The real estate investment trust, I’m not going to get into the structure of it because it’s very, very complicated, very, very similarly, it will return a portion of your investment growth or your distributions, dividends from that investment back to you tax-free. Yeah.

And the third one want to talk about today is just general expenses and appreciation.

Brian Persson (09:52.236)
Yeah. So whenever you buy a rental property, can deduct many, many of the expenses against that rental property, almost all of them. And you can also depreciate the property. So the expenses allow you to reduce the total income that you’ve made out of that property. And the depreciation allows you to deduct even more of the income that you made from that property each year. Consult with your tax professional on depreciation because

That one is not for everyone. really have to know what your real estate plan is for that property in order to know whether you should depreciate the property or not. So I’m not going to get too terribly deep into it, but know it’s a strategy out there. And the general expenses are just like any corporation, right? If you buy printer paper for your corporation, you get to write off that printer paper. If you buy insurance for your real estate portfolio,

you get to write off the insurance for your real estate portfolio. Yeah, you should. Absolutely. Yeah.

I fish bone shirts.

you’re think of any of your operating expenses, whether it be insurance, property taxes, maintenance, upkeep, all that, and even like gifts for your tenants, like over the holidays or whatever that looks like, you can write all those expenses off. Obviously, again, talk to your accountant because there are some expenses that aren’t exactly write offable. think like windows are a new roof because it’s considered.

Brian Persson (11:21.474)
Yep, exactly. Cause some things are considered improvements to the property and actually add value to the property so that you cannot deduct them as expenses. Again, your tax professional will help you sort out which ones are which. Our tax professional does a fantastic job at that. He’s very, very clear on what should be an expense and what should be a capital improvement it’s called. And yeah, like I think the key to.

Expenses with rental properties is just making sure you have really good bookkeeping because you can lose so much money just by not bookkeeping your rental properties properly. One of our mentors, Don Campbell, always used to say his wife did the bookkeeping and he would often be very lazy with his receipts and she would ask him, if you saw a $20 bill lying on the street, would you pick it up? And he’d be like, yeah. Then why are you throwing out your receipts? Because you’re throwing out a $20 bill.

So true.

And so if you have a really clean bookkeeping, really, really tight bookkeeping, you will do really well with your rental properties through expenses. can very often deduct your income to a very low taxable amount and your real estate portfolio in general will perform better.

Right. And then as discussed a little earlier, mortgage interest. You can deduct that on any of your real estate properties.

Brian Persson (12:45.228)
Yeah, exactly. Yeah. And one of the nice things about real estate, especially for us in our stage of the game where we’ve been doing it for a number of years, we can now very cleanly borrow from our real estate properties and invest into other things. And there’s no muddying of the waters in that. Like it is with your personal residence. So I want to be very clear on that. your real estate portfolio is not the same kind of mortgage. might be with the same bank.

they’re not the same kind of thing. Do not perform the same maneuvers between your personal residence and your real estate portfolio. So for us, we were able to borrow from our real estate portfolio and buy other real estate and we could write off both sets of interest.

Awesome. I know we talked about a few different strategies for tax advantages and we keep saying talk to your accountant because there are more. I mean, obviously you can Google some of these strategies, but in the end we still advise talking to your tax accountant. And if your tax accountant isn’t familiar with real estate investing, we’d recommend getting an accountant who is because they just have different ways of looking at things and a different understanding. And to wrap this one up,

I know this one’s short and sweet because, well, it’s taxes. My takeaway today is, again, talk to your accountant about the different tax advantages and know what you’re getting into before you do the work.

Yeah, my takeaway is that we mentioned kind of off the hop of the episode here. Taxes are generally your number one expense for your household. So it is your responsibility to make sure that that expense is as low as possible. So focus your energies on your taxes and pay less tax.

Jessilyn Persson (14:30.616)
Thanks so much for tuning in. Listen for more real estate investing stories in the next episode of a Life by Design podcast.

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Thanks again for listening. It’s been a pleasure being with you today.