real estate

What are Capital Gains and How do they Work?

/ Khalid Keshavjee / Leave a comment

When people buy investment real estate, they look to see how much the property will provide cash flow (money left over after paying expenses) and how much the property will appreciate (grow in value). The goal being to find a property that can generate the greatest yield for the money invested, and will turn the greatest profit at the time they choose to sell.

When an owner decides to sell, and assuming they make a profit on the sale, they are taxed on the gain from the sale- called capital gains tax. While there are a number of different tax details that an accountant can discuss further, capital gains are taxed on the difference between the sale price and the purchase price assuming that value is positive. If an owner loses money on the sale, as in they sell it for less than they bought it, it is called a capital loss, as they lost money on that sale.

This is particularly important for landlords who have owned their property for a number of years, and especially in cases where there has been strong appreciation in the property. Currently, capital gains is not taxable on a personal residence- a place that you own and occupy.

Capital gains are calculated as the difference between the sale price and the purchase price. If a person bought a home for $300,000 and sold it years later for $500,000, they are taxable on the gain of $200,000. However, capital gains only applies to half of that gain- in this case $100,000. They are taxed on that amount at their tax rate. People who make more money are taxed at a higher rate than those who make less.

A common question that we get at Amhurst is, “am I taxed on the amount I make after I pay off my mortgage or only on how much I made after the sale?”. The answer is it does not matter how the property was financed initially, the tax is payable on the full amount of gain.

Looking for a property manager who can advise you on what rental properties to buy or sell? Contact Amhurst today!

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The Alberta Budget And Taxation For Your Rental Property

/ Khalid Keshavjee / Leave a comment

The proposed Provincial Budget for 2019 has a number of items that are of note for people who own investment real estate. In a precious article, we talked about how investment property owners may be impacted should the budget pass. That article focuses on different measures that will impact your costs. This article focuses on how the new budget impacts your tax position as an owner.

As a disclaimer: Amhurst manages rental properties for owners, and is not a tax authority, income tax specialist, or The Government of Alberta. This article is not written to provide tax advice for your situation, nor can we accurately predict what the government will do next. Please consult your accountant or tax professional for advice on your specific situation.

Corporate Income Tax Reduction

This is a big one for owners who hold their rental property (or properties) in a corporate structure such as a hold-co, corporation or other incorporation structure. The Alberta Government decreased the corporate tax rate from 12% to 11% on July 1, 2019, and has announced a further decrease of one percent per year each year until 2022. Decreasing corporate taxes to 8% in 2022 will make Alberta the province with the lowest tax rate in the country, and will give Alberta a lower combined (federal and provincial) tax rate than 44 American States (page 8).

In doing so, The Alberta Government will be looking to make Alberta a more competitive place for people to invest. This is important for owners who hold their real estate in a Canadian Controlled Private Corporation (CCPC) and who are seeing positive cash flow. This move decreases the income that your corporation would pay on income made over the course of the year, and also would decrease the capital gains tax if you sell an investment property.

The government also announced that they would hold the small business deduction at 2%. Small businesses are currently taxed on active income up to $500,000 at this amount. Because it is active income, rental income would not apply nor likely would selling a rental property. Discuss this further with your tax accountant to see if this is applicable to your situation.

Increasing the Capital Cost Allowance

Houses are not designed to last forever. Over time, the physical building depreciates and upgrades are made. The Income Tax Act allows for individuals and businesses to claim the depreciation on the value of a capital expenditure based on a fixed formula.

The current budget allows for an accelerated capital cost allowance (CCA), in line with the Federal program already in place. While currently unclear, this likely will not apply to new purchases of income properties. It seems to be geared towards capital for clean energy and more active income ventures. Specifics on this matter may be introduced down the line, but it appears to be more clearly for other capital programs. As noted above, speak with your tax adviser to see if this is something worth doing in your situation.

Municipal Funding and Property Taxes

In today’s economic climate the government says on page 129 that ” When hard-working Albertans see their incomes shrink and struggle to make ends meet, they have to face their fiscal realities – and so do governments “. The Province will cut municipal finding quite substantially. This includes cuts to operating funds, grants programs, capital projects, transportation projects and more.

In order to make up for a shortfall in revenue, expect property taxes to increase substantially next year. This likely will hit both commercial, owners who have already seen huge increases in the past year, as well as residential owners.

Expect in the new year that your property taxes will increase, but with the economy where it is, it may be tough to pass the cost on to your tenants. At Amhurst, we constantly watch the market to determine where and when rents can be increased. If the market does improve in the new year and the prevailing market rents increase, it would be ideal to pass any increase on to your tenants, but it is unlikely at this point. This may be a landlord cost for the foreseeable future.

The Bottom Line

At the end of the day, there is a little bit to like for owners, especially those who own their properties in a corporate structure, as well as a little bit not to like, in terms of increasing property taxes. This budget is a big step for the province in terms of fiscal pruning, but expect more significant changes in the upcoming Federal Budget.

Photo courtesy of Jason MacIntosh of The Canadian Press

3 Ways The New Alberta Budget Impacts Your Rental

/ Khalid Keshavjee / Leave a comment

Now that the Federal Election has ended, the Provincial Government under Premier Jason Kenney has released their 2019 Budget. With low oil prices, high unemployment, and dissatisfaction with the government in Ottawa, this budget is designed to help put Alberta back on track. Because a budget it holistic, it tackles everything from healthcare to education to social services, but there are a few notes for investors who own rental property in Alberta

Tourism Levy

If you own a property that you rent out for short terms like on Airbnb or Vacation Rental By Owner (VRBO), this affects you. Currently, the government has a 4% tax on all short term accommodations such as hotels and B&B’s, but it has not been applied to short term rental suites. To level the playing field, the province will impose a 4% tax on all short term rentals starting in 2020. This tax will be implemented right through the listing website, but will make short term rentals less appealing as compared to hotels or other accommodation choices.

Electricity Regulated Rate

In 2016, the Provincial Government at the time announced plans to cap the electricity rate at 6.8 cents per kilowatt hour. What that means is if the electrical rate went above that amount, the government would pay the difference. This budget will eliminate that credit.

If you own a rental property where you cover the cost of electricity for your tenants, this may increase the cost of your electricity bills. If you live in a condominium, expect that your condo fees may increase as well as electricity costs are going up. How much is still to be determined, but expect that electricity bills will increase.

Carbon Tax Removal

As of June 4th of this year, Alberta no longer has a carbon tax. That means it costs you a few cents less to fill gas or to heat your home. It also means that many Albertans also won’t receive a rebate cheque for their climate usage.

With Alberta repealing the provincial carbon tax, the Federal Government has legislation in place that mandates either a carbon tax or cap and trade system for pollution in each province. Starting January 1, 2020, a carbon tax will be imposed on Alberta starting at $20 per tonne of carbon dioxide used and rising to $30 per tonne in April next year. The latter is the level that the carbon tax was at before it was repealed. This will then rise by $10 per year until 2022.

Expect that this will raise your gas bill by a little over 6.50 cents per litre and just under 6 cents per cubic metre of natural gas for home heating as of April, with a greater increase in the coming years. For landlords that provide heat for their tenants, and for condos that include heat as part of condo fees, expect bills to increase next year.

In a future piece, we will cover the tax impact of the new provincial budget on your rental property.

Photo courtesy of Jason MacIntosh of The Canadian Press

Diversifying Your Investment Portfolio

/ Khalid Keshavjee / Leave a comment

Recently, Saadat and I were at a seminar on economic trends in the global economy, and how that impacts investment strategies. One of our key takeaways was the value of alternative investments.

What is an alternative investment? An alternative investment is anything that is not a stock or a bond, can make you money, and does not tie directly to the investment market. Having alternative investments in your portfolio helps you to manage in turbulent economic times. While they may not necessarily provide you as great a return as investing in stocks, they provide a safe, steady and stable return. These can include currencies, pair trading , or even roulette! However, many of our clients have found success in owning investment properties.

When bought and managed well, rental properties provide stable cashflow to the owner in the form of rent, and strong appreciation upon sale. In most market conditions, having a good rental property should cover your operating costs, and leave you with some money in your pocket at the end of the day. If managed well, they can be used to fund your retirement down the road, as they become incredibly profitable once the no longer have a mortgage.

The biggest risk with buying an investment property is buying the wrong one. So often, clients have come to us with investment properties that they have bought and are disappointed when they do not see the yield they had expected. Often they expect a higher rent than what the market can bear. In these cases, an owner may be covering some of the costs of renting the property out. Buying the right property with the right advise can minimize this risk.

Whether buying a single investment property or making a larger investment in an apartment building or a commercial space, having the right advice is of prime importance.

Looking to diversity your investment portfolio, or have an investment property that needs managing? Contact us today

Photo Credits: Rob Berger: Dough Roller

Does Your Property Manager Understand Your Needs?

/ Khalid Keshavjee / Leave a comment

When you own a rental property, it is important to have a property manager who understands your objectives and makes strategic choices to meet those needs. Broadly speaking, there are three major groups of people who own investment properties:

Owners by Circumstance

Life changes. As families grow and change, dispossession of real estate is not always in one’s best interest. It is common, especially in low markets, for people to move to a new home, but choose to rent out their property because the price of selling would not be worth their while. In other cases, work or life could take one to another part of the world for a number of years, and they may choose to rent their property out for the time being.

Whatever the circumstance may be, having a property manager that understands your circumstances is important. Because the rental is likely a shorter term move than if it were a strict investment property, making large capital improvements may not be ideal right away- assuming the property is rental ready

Additionally, putting a tenant into the property on a very long term lease (greater than a year) may not be in your best interest. In Alberta, on a fixed term lease, the tenant has rights until the end of the term. Unlike in other provinces, an owner cannot force a tenant out of a property in order to reoccupy their home prematurely. Having a manager who understands your timeline is imperative.

Owners by Inheritance

As difficult as a family member passing away can be, having to deal with assets and wills adds additional complications. Sometimes, families are left with real estate that needs to be managed. It can be anything from a single condo unit to a whole apartment building, but because family members may not want or be able to, hiring a property manager may be a wise decision.

“Your property manager should not be getting involved in family matters, but should be making life easier during difficult times.”

In these cases, your property manager should be adept enough to consult with decision makers to understand ownership objectives. Because these situations can be turbulent, ensuring that the property is well taken care of and any potential risks are mitigated are primary concerns for any owner. If it is an investment property, your property manager should ensure that money is paid to the right people, per the terms of the trust arrangement, and that decisions are made by those empowered to do so. Your property manager should not be getting involved in family matters, but should be making life easier during difficult times.

Owners by Choice

Owners who buy a property as an investment look primarily at two factors: What does the property rent for and what type of property appreciation will I see when I sell? A good property manager knows that keeping the property occupied is most important. Not only does it minimize costs to the owner, it minimizes risk as between the tenant’s insurance (which a good property manager ensures they have) and them being in the house to notice issues can often catch issues more quickly.

A diligent property manager also looks for ways to enhance the value of your investment property. Not only do they inspect your property to look for issues, they can also advise you on capital improvements that you can do to upgrade the property. And because they manage multiple properties, they may be able to get you a better price on these projects and work with trusted trades that will get the job done right the first time. Not only does this increase the value of your investment, it often increases the asking rent for your home, putting more money in your pockets.

Having a property manager who works for you also optimizing major costs to your property through strong preventative maintenance programs. From ensuring your roof is inspected to ensuring the tenant is maintaining your home properly, they work to ensure you do not have to make capital upgrades too often.

“Retaining tenants is a best practice in property management”

A good property manager will also employ strategies to ensure tenant retention. Keeping a tenant in your home for more than one year decreases your leasing costs, and is also less onerous on your house. If a tenant is in your home and generally comfortable living there, it saves you the cost of doing major upgrades. Additionally, moving furniture and boxes both out and in takes a toll particularly on your carpets and walls. Retaining tenants is a best practice in property management, and something your manager should have strategies for.

Signs Your Property Manager Is Working For you

Every owner has different needs. Your needs may be different from the needs of an owner who has a similar ownership structure. Regardless, your property manager should be aware of your objectives, and work towards achieving them. Starting from an initial consultation with a manager who asks about your objectives, right until the day that you choose to sell the property, it is important that they are on the same page as you.

If you are looking for a manager who will work with you to meet your management objectives, do not hesitate to contact us directly.