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I am thinking of using CCA for rental property. But is it a good idea to use?
Is CCA for rental property a good idea?
- Thread starter flyingsquirrel
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Depends a lot on your overall tax situation.
Some people will claim enough CCA to bring overall rental revenue to zero so no additional tax is due. However, this amount will be recaptured by CRA when you sell. Others will pay the tax on the income yearly and not have CCA recapture to worry about.
http://www.cra-arc.gc.ca/E/pub/tp/it478r2/it478r2-e.html
Some people will claim enough CCA to bring overall rental revenue to zero so no additional tax is due. However, this amount will be recaptured by CRA when you sell. Others will pay the tax on the income yearly and not have CCA recapture to worry about.
http://www.cra-arc.gc.ca/E/pub/tp/it478r2/it478r2-e.html
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Given the option of paying $1 tax today or $1 tax in 5, 10 or 30 years I'd rather pay the future $1. Future dollars are worth less than today's dollars.
Those are my thoughts but I am not an accountant.
Those are my thoughts but I am not an accountant.
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[quote user=JimWhitelaw]Others will pay the tax on the income yearly and not have CCA recapture to worry about.
really ? Why ?
really ? Why ?
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It really depends on your situation and preferences. As mentioned, it's common for some to use CCA to bring rental income down to zero so no additional tax is due (keep in mind CCA can not be used to create or enhance a loss). The trick is to keep in mind that typically speaking (assuming the property has at least held its value, if not gone up) when you sell, you'll have to repay any CCA as 'recapture' in addition to any capital gains on the property. This becomes more and more true the longer you've held the property. IE, a $1000 CCA for 20 years would then result in a $20,000 recapture added to your bill.
The other thing to keep in mind is the different tax rates. If you're one of the lucky folks who is always in the highest tax bracket, this doesn't really matter to you. But for those of more moderate tax situations, you may find yourself using CCA to reduce low-mid tax rates, but when you sell and all that CCA gets recaptured as well as your capital gains, you may find yourself having saved mid-level tax for years, and repaying high level tax.
As much as it isn't fun leaving possible tax deductions on the table, there's definately an arguement for NOT claiming CCA. All depends on your personal situation.
The other thing to keep in mind is the different tax rates. If you're one of the lucky folks who is always in the highest tax bracket, this doesn't really matter to you. But for those of more moderate tax situations, you may find yourself using CCA to reduce low-mid tax rates, but when you sell and all that CCA gets recaptured as well as your capital gains, you may find yourself having saved mid-level tax for years, and repaying high level tax.
As much as it isn't fun leaving possible tax deductions on the table, there's definately an arguement for NOT claiming CCA. All depends on your personal situation.
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I am just curious. How many of you claim CCA and how many did not?
I think i will use the CCA to enhance my cash flow now because it is more critical for me to have more cash flow now.
I think i will use the CCA to enhance my cash flow now because it is more critical for me to have more cash flow now.
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CCA is used for tax purposes only. It is usually used to reduce taxes on taxable income to 0, using up to 4% of the building/house (excl. land !!) for 25 years !
Most (99%+) of real estate investors use it, as it is better to defer taxes in most cases !
Most (99%+) of real estate investors use it, as it is better to defer taxes in most cases !
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Is CCA recapture treated as a capital gain or is it a distinct category treated as income on sale?
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I am not quality to ans this question, but I think it is capital gain.
Because we are comparing the capital gain here.
http://www.cra-arc.gc.ca/E/pub/tp/it478r2/it478r2-e.html#P104_10670
Because we are comparing the capital gain here.
http://www.cra-arc.gc.ca/E/pub/tp/it478r2/it478r2-e.html#P104_10670
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CCA recapture is not treated as a capital gain, but as business income just as CCA reduces business income, when it is claimed.
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I am so sorry for the misleading.
Thank you for correcting me.
Thank you for correcting me.
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[quote user=FraserCampbell]Is CCA recapture treated as a capital gain or is it a distinct category treated as income on sale?
recapture is treated as income NOT a capital gain.
it is strictly tax deferral on business income .. namley income on rental income minus all op expenses minus interest on the mortgage that you would have otherwise paid without CCA !
recapture is treated as income NOT a capital gain.
it is strictly tax deferral on business income .. namley income on rental income minus all op expenses minus interest on the mortgage that you would have otherwise paid without CCA !
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Do most investors zero out their rent?
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[quote user=flyingsquirrel]Do most investors zero out their rent?
yes
yes
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Thanks. I think that is exactly what I am going to do.
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[list type=decimal]
[*]Is hotel operation will be taken as Business in comparison to rental apartment building? So does that mean a Hotel Business Income is not be deducted with CCA while CCA will be deducted for depreciable apartment building.
[*]Will Large Corp incomel be taken as business income while individual's 12-plex will be taken as rental income?
What does that mean: Rental Property Restrictions: CCA deductions for rental properties can neither create nor increase a loss on rental properties when held by individuals, partnerships or selected corporations.
Is rental income part of capital gain?
[/list type=decimal]
[*]Is hotel operation will be taken as Business in comparison to rental apartment building? So does that mean a Hotel Business Income is not be deducted with CCA while CCA will be deducted for depreciable apartment building.
[*]Will Large Corp incomel be taken as business income while individual's 12-plex will be taken as rental income?
What does that mean: Rental Property Restrictions: CCA deductions for rental properties can neither create nor increase a loss on rental properties when held by individuals, partnerships or selected corporations.
Is rental income part of capital gain?
[/list type=decimal]
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[quote user=OurRealtor]Is hotel operation will be taken as Business in comparison to rental apartment building?
yes, it is "active" income as opposed to rental income which is passive with different tax rates
[quote user=OurRealtor]CCA deductions for rental properties can neither create nor increase a loss on rental properties when held by individuals, partnerships or selected corporations.
It means you cannot deduct "artificial" losses created through CCA from your other non-rental income, say personal or non-building related income in a corporation ! You can only use "real" losses from operating expenses to offset against other income
[quote user=OurRealtor]Is rental income part of capital gain?
no, capital gain is on the value appreciation (if any) of the capital asset only !
yes, it is "active" income as opposed to rental income which is passive with different tax rates
[quote user=OurRealtor]CCA deductions for rental properties can neither create nor increase a loss on rental properties when held by individuals, partnerships or selected corporations.
It means you cannot deduct "artificial" losses created through CCA from your other non-rental income, say personal or non-building related income in a corporation ! You can only use "real" losses from operating expenses to offset against other income
[quote user=OurRealtor]Is rental income part of capital gain?
no, capital gain is on the value appreciation (if any) of the capital asset only !
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Here is something else to consider. As mentioned in one of the above posts, if there is a lot of CCA accumulated over the years, your tax bill be be higher espcially if you have jumped up a tax bracket or two. I look at it this way - in my circumstance, cash is tight. A lot of my properties are newer and with the tightening of the rental market, I run slightly positive cash flow. Cashflow is King so I take the benefit now, because when I sell I will have the cash to pay the tax bill. That is not necessarily the case now.
Moral of the story - everyone's situation is different and you need to have a view into your present as well as your future in order to make a reasonable decision. At the end of the day, hindsight will prove out which was the better strategy. There are no wrong answers, so make the best educated decision that you can today.
Peter
Moral of the story - everyone's situation is different and you need to have a view into your present as well as your future in order to make a reasonable decision. At the end of the day, hindsight will prove out which was the better strategy. There are no wrong answers, so make the best educated decision that you can today.
Peter