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One Tip on Startup & 5 Tax Considerations Buying a place for University Kids

We are back at the Realtor Quest this year. This is our third year at the event.

It’s always interesting to meet a few familiar faces and so many new faces.

Hanging out at RealtorQuest 2018

Hanging out at RealtorQuest 2018

One realtor that I spoke with last year came up to say hi to me.

He thanked me for talking to him about HST Quick Method last year.

He hadn’t been using Quick Method in filing HST in the last 10 years.

According to him, he left over $30K on the table.

Naturally, he complained about how he never got the advice from his accountant.

He went on to ask me about my service offering and pricing. He gasped when I told him how much I charge.

We are not a transactional-based accounting firm. We strive to provide value-added service that will save you money, give you peace of mind and achieve your goals.

The key is to decide on the type of customers you want. If you have your own business, you know what I am talking about.

My pricing used to be low too. To build up a business, I need volume to make up for the low fees.

Because of the high volume, I can never have sufficient time to spend with each client and provide the type of service I would like to as a value-added advisor.

Clients start to complain about the turnaround time and the service level. I had been way too busy doing returns one after another. At the end of last season, I got fed up too.

I’ve since learned that to accurately provide the tax saving tips to my clients. I need time.

To afford the time, I need to do less volume and provide proper service.

To use our Ontario Premier Wynne’s latest quote before her final televised debate before the election, “Sorry. Not sorry.”

I am sorry I can’t service everyone out there, but I am not sorry for striving to provide all the value added service to all my clients.

And I am not alone here.

For real estate investors out there, you can choose to buy in a market that has relatively high rental income but limited appreciation opportunity. These markets can have less population and limited job opportunities pushing vacancies higher.

Or you can buy in a town that has higher pricing, strong economic fundamentals and high appreciation potential and close to zero vacancies.

Different strategies result in different clientele and different businesses.

Same for all realtors out there. Some realtors decide to compete on pricing by offering low commission rate. Some realtors provide value-added service and charge more in exchange to make the process painless.

Knowing who you want to serve is the MOST IMPORTANT step to start a business.

Now on to this week’s topic.

The Globe and Mail recently had an article “Cost-conscious parents buying condos for kids studying away from home”.

It was an exciting topic to me. After all, we have two young children, and hopefully one day they will also go to university.

Here are some tax tips that you may want to consider:

If you are buying the property as a second home:

If you are purchasing the property as a second home, one distinct advantage is the low down payment option. According to the Globe and Mail article, you are only required to put 10% down.

  1. Mortgage insurance can be deductible

You are required to purchase mortgage insurance for any property acquired with less than 20% down.

Mortgage insurance can be deductible over five years as finance charge if you are renting the property out.

  1. You will have to pay capital gain tax on one property

Since this is a property that your kid lives in, you may be eligible to designate this new residence as your primary residence and shelter some capital gain tax.

But at any given year, you can only designate ONE property as your primary residence.

If you decide that the kid’s university residence is your primary residence for tax purpose, you will have to claim the capital gain on your real primary home that particular year.

It is best to talk to a professional accountant to get a better understanding of how much capital gain tax you will need to pay.
Our free report can provide a rough calculation on how much capital gain tax you may be liable for if you sell the property.

  1. Rental income must be reported if you are renting out to a third party

If your child is using the property to attend university, no rental income is charged, no expense can be claimed.

If you child pays you to rent, any rental loss incurred cannot be deducted, even if the rent is at fair market value.

If you decide to rent out the property to an arm’s length third party after your child graduates, you are required to report the rental income and expenses. If rental losses are incurred, you can still deduct the losses.

If buying in the kids’ name:

Can you buy in the kid’s name? There are more hoops to jump through from a mortgage perspective more so than a tax perspective.

One significant tax advantage is that your kid will be able to claim this residence as a primary residence, sheltering all the capital gain tax on this property while he lives there.

In the future, when the property is rented to a third party, rental income and expenses will be reported in the kids’ tax return.

While the amount of taxes can be minimized when the property is purchased in the kids’ name, the biggest downside is that you lose control over the property and the appreciation.

Until next time, happy Canadian Real Estate Investing.

Cherry Chan, CPA, CA

Your Real Estate Accountant

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