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Renting vs buying a home? Here's what you need to know

by UFile Team Équipe ImpôtExpert | Mar 05, 2019   Comments:

UFile-Blog-Housing

Buying a home is by far the most important financial decision you will make in your life. Let’s have a look at some of the factors to consider before taking this major step.

To buy or continue renting?

This is the age-old question. From a financial standpoint, should you focus on owning a home as soon as possible, or should you wait and rent for a longer period? Then again, you might decide never to buy a home.  With that being said, the advantages of owning a home can be substantial:

  • Each mortgage payment you make buys you more equity in your home. You are essentially investing in an asset that will eventually be yours.
  • More often than not, a home appreciates over the years, so your home becomes an investment on the same level as a stock or bond.
  • You can renovate/design your home to suit your needs since it is yours; this would be restricted if you’re renting the home.
  • There are possible tax benefits (see below).
  • You have the option of increasing your income by renting out a portion of your home.

Of course, owning your home comes with certain disadvantages as well.

  • Your overall monthly payment (mortgage, property taxes, insurance) will likely be quite high, especially in the first five years of ownership. This payment will increase if you don’t have a 20% down payment at the purchase date, in which case you will be required to pay mortgage insurance as well. To remain financially sound, the rule of thumb is to never spend over 30% of your gross monthly pay on housing. Failing to meet this rule will likely prevent you from funding other projects such as vacations or retirement saving plans.
  • You WILL have renovations/repairs to do on your home. This is not a matter of “if” but “when.” If you’re not a handy person, contractor fees can be quite high.
  • The increase in value of your home is never guaranteed. We’re talking about you, 2008 financial crisis!
  • Your home does not give you an instant return on your investment; it is a liability as long as you live in it (maintenance, monthly mortgage payment, property taxes). You only get a return on your investment when you sell it. This can take a while compared to stocks or bonds, for instance, which can be sold in a matter of seconds.

Based on the above, it might be wise to continue renting for a while longer or unfortunately, in some cities where housing values have reached astronomical proportions, maybe not buying at all. Being house poor is a situation that you might not ever overcome financially.

Tax Implications

There are certain tax breaks available to homeowners. Let’s look at a few of them.

Home Buyer’s Amount

When purchasing your first home, you can claim a $750 tax credit on your tax return. There is a catch though: you will only be considered a “first-time buyer” if neither you nor your spouse owned a home that you lived in in the current year or the previous four years.

Principal Residence Exemption

When you sell your home, the capital gains (profit) earned are tax exempt. You must designate on your tax return the years during which you lived in your house as your principal residence. This designation can only be done for one home per year, which means that you cannot double dip on this exemption for a secondary home or a cottage. Note that if you rent out a portion of your home, the exemption only applies to the portion that you live in.

Home Buyer’s Plan

You can borrow from your RRSP account to put a down payment on your first home. You can use up to $25,000 and you have 15 years to repay your RRSP starting the second year after the withdrawal. As with the Home Buyer’s Amount, the main condition is that neither you nor your spouse owned a home that you lived in in the current year or the previous four years.

Housing Expenses

Housing expenses such as property taxes, maintenance and repairs, mortgage interest and depreciation are deductible as long as you are receiving rental income from your home. In other words, if you rent out a portion of your home, either permanently or through a “sharing economy” platform like AirBnB, these expenses are tax deductible. Keep in mind that the expenses have to be prorated based on the portion of the home that you rent, and in the case of AirBnB, they are prorated again based on the rental period.  

If you don’t rent out your home, you can make your mortgage interest deductible by getting a re-advanceable mortgage. The concept is simple: every payment you make to your mortgage increases your limit in a parallel home-equity line of credit (HELOC). If you pull money out of this HELOC and invest it in an asset that pays you what the CRA considers investment income (interest, dividends), the interest that you pay on the HELOC becomes tax deductible. However, be careful when using this type of investment vehicle as pulling out funds from your HELOC means that you are putting yourself further into debt.

Would you like to learn more about the tax implications of buying a home? Connect with us on Facebook and Twitter for news and updates on the 2018 tax return and UFile online tax software. Visit Tax & U to get accurate answers to all your questions about your 2018 tax return.

 

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