Wednesday, April 27, 2016

Tax Time – It’s a Wrap

As we are in the last week of April, tax season is almost officially over.  Hopefully by now you’ve compiled all the info, met with your tax professional (if you don’t do it yourself) and are done filing your return. Some of you will be paying your balance owing, or if your lucky, getting back a nice tax refund.

To wrap up this series on Tax Time, we’d like to leave you with a few pieces of advice and insight as it relates to taxes and real estate and some of the crossovers between the two.

Stay Organized

As a landlord especially, you have lots of money coming in and going out every month. It’s important to stay on top of the paper trail so it can all be properly input at tax time. It’s much easier to do a little bit regularly, monthly or quarterly, than to leave a huge pile for tax season. The onus is on the filer to show receipts and invoices should CRA ever come calling. Not having your paperwork in order can cost you! We consider this time and money well spent to hire a bookkeeper to do this for you.

Look At Your Investments On An After Tax Basis

It’s great that you are investing in real estate and making money, but what do you really have to show for it come tax time? We often see people who know how much positive cash flow they have monthly or yearly, or what cap rate their property runs at, but hardly ever anyone who look at how their properties perform after taxes are accounted for. Tax season is a great time to review how your properties are actually performing. For example, say you have an investment property with a fixed rate mortgage at 3% and you’re in a marginal tax bracket of 40%. Because mortgage interest is tax deductible, your after tax interest cost is 1.8%. You have some extra cash and were thinking about making a prepayment on this mortgage. When you look at it in this after-tax light, you may consider there being a better use for the cash that can achieve a better rate of return after tax (highly likely in this case).

Give Thought to Tax Planning When Considering Real Estate Transactions

You might have a plan to dispose of a long held rental property in the near future.  The market might be hot right now and you’re thinking it’s a good time to sell. You also are a higher income earner but planning to retire in a few years and drop into a much lower tax bracket. All else being equal, it might make sense from a tax liability stand point to wait on that sale until you’ve retired to pay less tax on the proceeds of your sale. This type of planning is best done with your tax professional.

It’s Not All Bad

Sometimes we hear people complain about their tax bills around this time of year.  To all those high income earners: would you rather make less money? It's generally a good problem to pay a lot of taxes because it means your making a lot of income! Make the best of the situation by maximizing allowable deductions and efficient tax planning.

That’s a wrap for the tax season. How was tax season for you?

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