Strategies to consider when buying a second property

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My friend Joel wants to buy another property. He can use whenever he wants but can rent when he is not at the place.

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“Tim, I’m looking for a property with at least 30 acres, with rolling hills, a stream, and a pond, but within walking distance of theaters, shops, great restaurants, and nightlife.”

“Sure Joel, and I want my car to fly and make breakfast for me,” I replied.

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“I think they’re working on that,” he said.

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I have been writing about buying real estate for the past two weeks. Today, I want to end the conversation with some thoughts about three common types of second property: cottages, income property and American real estate.

cottage property

If you have been looking to buy property in cottage country in the last 18 months, you will know that the prices have increased dramatically. I have spoken to many people who want to explore places away from the city.

My first observation is that cottages and cabins are a sentimental thing. Sometimes, emotional decisions outweigh financial decisions. If you are looking to buy a place, I understand that the memories and experiences associated with a cottage, or the likelihood of these, may outweigh the financial considerations of today’s purchase. And that may be okay — as long as you’re not putting yourself in a tough financial situation.

If you are going to keep a cottage in the family for several years, you would be wise to create a cottage agreement which, once ownership is transferred to the children, will guide the division of the cottage among the family members. This type of agreement for cottage owners is a shareholder’s agreement for business owners. This will guide decisions regarding maintenance costs, maintenance responsibility, use by visitors, when to sell the property and much more. (See my article, “A Cottage Settlement Can Make Sharing a Summer Home Easier,” dated May 21, 2020.)

Vacation retreats can generally qualify as a principal residence, so when you sell, move or pass away the property, you may be able to shelter any gains on the property from tax. . But you should go to a tax professional to discuss it.

If You Want to Own a Property, Consider These Strategies First

The basic residency rule for Canadian homeowners works as follows

income property

Perhaps you’ve heard that income-producing assets are an “ideal” investment. The meaning of the abbreviation IDEAL is:

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  • Income: A rental property can produce income that can completely replace or supplement other sources of income – and this income opens the door to claiming a variety of tax deductions.
  • Depreciation: If you own an income property, you can shelter part of the income by claiming a capital cost allowance (CCA, or depreciation) for tax purposes—between 4 percent and 10 percent of each of your assets’ depreciation costs. A big cut of the year. If you later sell the property for a larger profit, you may have to reclaim some of the previously claimed CCA (included in your income), so talk to a tax pro about it.
  • Share: If you borrow money to buy a property, it is like a forced savings scheme. With each mortgage payment you make, the amount you owe to the bank declines, and so does your equity in the property.
  • Appreciate: It is expected that an asset will appreciate in value over the long term. There is no doubt that some years will be better than others, and some years may see a drop in prices, but in the long run, it is reasonable to expect your net worth to improve as real estate prices rise. Is.
  • Take advantage of: There are not many properties that you can buy with borrowed money as much as you can buy with real estate. It is not uncommon to borrow 75 percent of the cost when investing in income property. It allows you to use OPM (other people’s money) to build wealth for yourself over time.

American Properties

If you want to buy property in the United States, you should get some tax advice. You’ll want to avoid U.S. estate taxes at the time of your passing, so it may be wise to set up a trust to acquire assets.

You should also be educated about the “substantial presence test” in the US, which can complicate your life by requiring you to file tax returns south of the border if you spend a lot of time in the US – although in most cases You will not be required to file more than one US tax form – Form 8840, “Closer Connection Exception Statement for Aliens” – which verifies to the US Internal Revenue Service that you have a close relationship with Canada and that you must file a completed US tax return. Doesn’t need to be done.

Finally, if you’re going to be renting out your US home for any part of the year, this opens up a number of other tax filing requirements on both sides of the border that you should talk to a tax pro about.

Tim Sestnik, FCPA, FCA, CPA (IL), CFP, TEP, is a writer, and co-founder and CEO of Our Family Office Inc. they can be reached here [email protected].

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