By Dalia Barsoum
Tax time is not fun, especially if you own multiple properties and have to provide your accountant with income and expense information for each property for the past 12 months.
Aside from that part of the process, I actually love tax time because it is the only time of year I get the opportunity to be 100 per cent in control of my portfolio financing for the rest of the year.
Let me explain.
Many investors go through the motion of filing as much as they can in terms of property expenses and showing less income on their personal taxes (for those of us who are self-employed) in order to reduce their tax bill on the net collective income they make.
While nothing is wrong with legitimate expenses and saving on your tax bill , it's important to remember that once your portfolio is at its fifth property (which I refer to as the "tipping point"), the net surplus/deficit reported on the statement of real estate rentals on your yearly tax return start to play a pivotal role into your ability to continue to borrow at attractive rates, with 20 per cent down, 30-year amortizations with no rate or insurance premium or increase to the down payment.
This is all assuming that your personal income stays stable or increases at a rate of less than the rate at which you add residential property mortgages to your balance sheet.
Pre-planning your rental property taxes the right way with your mortgage broker and accountant can literally open up financing of 11 more doors for you at attractive financing terms.
So, why learn the hard way? Why report only to find out the numbers don't work when it's time to finance?
An experienced lending adviser, who focuses on portfolio planning and understands how lenders look at personal and rental income on the T1 generals and statements of real estate rentals, can help you determine two key things that can make all the difference in terms of what you qualify for and the types of financing terms you get.
1. The new surplus you need to report per property.
2. How much income you should report on line 150 (for those of us who are self-employed).
The lending adviser can also work with your accountant and advise you of the trade-offs associated with reporting more income and potentially paying a higher tax bill to qualify for favourable financing down the road versus saving on taxes now but dealing with higher down payments, insurance premiums, shorter amortizations or higher rates later.
With the facts at hand, you can make an informed decision about which way you want to save:
On the taxes or the financing?
The answer will depend on where you currently are with your portfolio, as well as balancing off the short and long-term benefits.
Dalia Barsoum, MBA and Fellow Institute of the Canadian Bankers Association, is a best-selling author of 'Canadian Real Estate Investor Financing
– 7 Secrets to Getting All The Money You Want'. Contact her via her Canada-wide, investor-centred lending practice, StreetwiseMortgages.com or via CanadianInvestorFinancing.com.
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