QUOTE (thomasbeyer2000 @ Oct 22 2009, 02:45 PM) why not ? claimCCA today .. and reduce taxes today .. and repay it later .. and pay capital gains taxes later .. assuming it is a long-term hold with rental income as opposed to a flip where you pay business income.
CCA allows you to reduce income taxes while holding .. and yes up to 4% of building value annually ..
Some years you may not use CCA at all if you expense certain major items like a new elevator or a new roof or a new boiler .. as replacement of items can be expensed as opposed to capitalized !!
Hi Jason,
Why not consider it in the following context:
Home owner A buys a 200,000 property with a building valued at $100,000.
He rents it out for 10 years and has positive cash flow of 3% per year plus inflation @ 3% per year: Total positive cash flow: $68,783. Owner A depreciated or applied CCA to reduce his net rental income to zero. Thus he earns a total of $68,783 tax free over 10 years.
He reinvest the net rent into other things that return him 10% per year in a Tax free savings account (e.g. Bell Alliant Trust Income Units). In year one he made $6000 in rent and at the end of the year he earned tax free another $600 (not quite correct), and the year there after he earned another 10% on $6600 dollars or $660, and after 10 yrs he made a total of $14,148 on his first year`s net rent. In the second year he made another $6180 in tax free rent, which he also invests in his TFSA and at the end of the 10 year period he returns another total of $13,247. He continues to do so until the end of his ten year term; he made $107,128.00 tax free in net rents and reinvestment income.
His $200,000 has appreciated at 6% per year in a pretty smooth real estate market uptrend and after ten years it is worth: $337,896. His taxable cap gains are 337,896-200,000 + CCA(=68,783)= $206,679. Half of which are taxable at a top margin rate of 37% in Alberta or on an after tax basis he made: $99,660.
His total profit is $99,660 in after tax cap gains and another $107,128 in rental and reinvestment profits (made tax free). Total AFTER TAX return: $206,788.11
Owner B buys the same property and rents it also out. He also makes a net rent of 3% plus 3% inflation. He does NOT apply the CCA and he does not reinvest in a TSFA. However, he does invest his after tax net rent in a 10% per year paying mortgage. His after tax cap gain is 112,385.07 plus $58,552.46 in after tax rent and reinvestment income totaling an after tax profit of $170,937
Tax planning made owner A an extra $35,850. Thank you Mr. Flaherty!
Now comes the clincher: Owner A used leverage and paid down $35,850 or 18%. The interest on financing was paid out of cashflow and thus Owner A made 100% profit on TAX SAVINGS ALONE. Not counting his other profits.
So there is the power of tax planning.
Before you say, yes but there was also the TSFA! What if you did not reinvest at 10%?
Oh... Eh... thennnn Owner A made cap gains of $99,660 plus $68,783 or $168,443
Owner B made cap gains of $112, 385 plus $43,333 or $155,718
That would be still $12,724.91 more for the CCA deducting owner A.
Now, you may be theoretically right that you depreciate only the building, but that makes no difference to me because for me only the bottomline counts and therefor I look at the return on the entire property and don`t worry about whether the building realy decreases in value overtime or not.
You might be right, when dealing with newly build properties that have a total depreciation that is so large the property itself can not keep up with the normal 6% annual real estate depreciation. This will be true if an disproportionate expensive building is put on the land. However, for `normal` run of the mill real estate we don`t have to worry about that, because it appreciates 6% including building depreciation.
Hope this helps (seeing things my way)
