I started buying real estate because I saw value in purchasing assets that could generate income, and I wanted the freedom this could bring. A smart man once said, "Work on your business, not in it." By hiring a real estate bookkeeping service, you create more time and freedom to spend on tasks that grow your business or the things in life that are really important. I didn't get into real estate investing because I like dealing with tenants, receipts, and taxes. What is important to you? I'd rather spend my time "hanging out" than working on tasks that can be easily outsourced. See what I did there?
As real estate investors, we often talk about the importance of having a good team. We are usually very good at finding deals, negotiating contracts, and seeing a vision through from start to finish with various industry professionals. Speaking from experience, organization and expense management is often something that gets neglected, leaving me scrambling at tax time. Over time, I've learned that systems are vital to managing expenses and keeping things organized. Whether you want to spend your spare time analyzing new deals or simply spending time with your family, hiring real estate bookkeeping services can be a real time-saver. Here are some tips for the real estate investor in you when tax time comes around.
Create a Google Drive or Dropbox account for document management, including expense receipts, bill payments, legal documents, and income management. Organize it according to property and year so that you can easily go back and see all your documentation from years past. This eliminates the proverbial shoebox that so many of us show up to the accountant with in the spring while they curse us under their breath. Receipts also fade with time, so it is a good idea to have a digital copy for your records. Plus, when you hire a real estate bookkeeper, they can easily go through the files and get everything into accounting software to make things that much clearer. Here are some more things to watch out for at tax time.
Capital Gains Tax On Real Estate
If you sold a home in the last calendar year, chances are you will be paying capital gains tax. However, profits from the sale of a home can be recorded as income or a capital gain based on your intentions. This is important because income is 100% taxable while capital gains are only 50% taxable. If you plan on holding a home for an extended period of time after purchase, buying a multi-unit residence or a commercial property, this would fall under the capital gain category and be taxed at 50% in most cases. However, if you purchase a property intending to flip (renovate and sell) or build new housing, this can be considered income and would be taxed at 100%. Rent to own is often considered income. However, if it is done infrequently, the CRA may allow you to claim it as a capital gain. The important thing here is to keep your records from purchase and sale so your bookkeeper and accountant have all the information they need to provide you with the best advice.
Tax Deductions If you incur an expense to generate income, generally, it is tax-deductible. Some common examples include:
Finance charges (Mortgage insurance, refinance legal fees, mortgage fees.) Finance charges are deductible over five years, not at the time of payment.
Line of credit interest
Accounting and bookkeeping fees
Property management fees
Repair and maintenance
Millage. Only the percentage used for business purposes.
Home office expenses
Expenses incurred to prepare a property for rent/sale or to bring new value to the property (upgrades/renovations) will not fall under repairs and maintenance. These expenses will be capitalized. A capitalized cost can be claimed against the sale of the property but not at the time of charge.
When should I set up incorporation for the purchases of my properties? There is no right time to set up a business corporation. It all depends on the needs and goals of the individual. Becoming incorporated closes some doors to possible future lenders and financing opportunities. Nevertheless, it brings the possibility of lowering your income tax through income splitting and tax deferrals. It also depends on the level of risk you are willing to take. Having comprehensive insurance coverage is important here.
When you plan on passing your portfolio to future generations, it is best to incorporate and include them in the business as it makes for a smoother transition and reduces the amount of taxes they will have to pay. This is also a tax benefit if you plan on re-investing a large portion of the business income back into the corporation. This is because when you pull out business profit as personal income, you are taxed at a higher rate than if you were to leave it in the corporation to be re-invested into other properties.
Capital Cost Allowance Capital cost allowance is a tax deferral tactic where you deduct amortization of a property (depreciation). When you claim capital cost allowance, you do not pay tax at the time. Taxes are recorded with the sale of the property. This is handy to reduce your taxes yearly. Just be aware that you will trigger the capital cost allowance repayment when you sell the property. So make sure you keep some of the proceeds from the sale available to repay this!
The attention to detail required to maintain your books can be meticulous and time-consuming. Beam Property Partners has full-time bookkeepers on staff to assist you with streamlining your bookkeeping and can help to alleviate the stress associated with tax filing. Sierra Belansky is passionate about helping you to stay organized and successful in your real estate ventures. She has seven years of experience in finance and small business bookkeeping. If you are looking for someone you can trust to work with your accountant to prepare your taxes or if you have real estate taxation questions, let's chat. Allow us to do what we do best to give you more time to focus on what you do best.
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I'd love to hear your thoughts on this! Have a great week while working past those obstacles on your climb to success. Let's Grow Together!
Real Estate Investor and Entrepreneur
Jonathan Beam is a real estate investor in the Niagara region who is passionate about helping you achieve financial freedom through real estate. He works with new and experienced investors to formulate a plan that fits your specific situation and provides market guidance and consultation on the best places and strategies to pursue within the Niagara Region. Book a free, half hour no obligation consultation to see how he can help you achieve your goals. His travels are available at www.realestateandrepeat.com
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