Hi there - just wondering what others think about claiming Capital Cost Allowance. We have 3 properties with joint venture partners. Net profit for each of the 4 partners (25% each) is about $2000.00. Claiming CCA could bring this down to zero, although I have to figure out the land value vs the building value. My initial feeling is that if you claim CCA now, it will just be added back as a capital cost allowance recapture when the property is later sold (at a profit we assume!) Unlike capital gain which is only taxed on 50% of the gain, CCA recapture is taxed at 100%. In view of this, would it not be better to have a small net profit each year rather than have several years of CCA write off added back as income in one year when the property is being sold? Any comments?
Capital Cost Allowance
- Thread starter mcgowan
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what is better ? paying taxes now .. or paying the same amount years, perhaps decades later ?
Use CCA to bring profit to 0 .. then yes, you pay it when you sell .. if ever (as you may not sell) ...
Use CCA to bring profit to 0 .. then yes, you pay it when you sell .. if ever (as you may not sell) ...
Yes that`s the dilemma. However, let`s say there is $2000 net profit for the next 10 years = $20000.00 and we use CCA each year to reduce net income to a zero.
Property was purchased for $200000.00
CCA on the buidling taken over the 10 years = $20000, the amount used to reduce income to zero
Then let`s say we sell the property in 10 years for $300000. There will be capital gain of $100000 - taxed at a 50% rate of inclusion (today`s rate)
However, you would also pay tax on the $20000 recaptured Capital Cost Allowance, thus paying tax on $20000.00 in one year rather than on $2000.00 per year over 10 years.
If you are not going to ever sell it, yes it is a non issue.
Property was purchased for $200000.00
CCA on the buidling taken over the 10 years = $20000, the amount used to reduce income to zero
Then let`s say we sell the property in 10 years for $300000. There will be capital gain of $100000 - taxed at a 50% rate of inclusion (today`s rate)
However, you would also pay tax on the $20000 recaptured Capital Cost Allowance, thus paying tax on $20000.00 in one year rather than on $2000.00 per year over 10 years.
If you are not going to ever sell it, yes it is a non issue.
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Don`t forget that government can change the rules on us in `mid-flight` and that these changes can be either for the worse or for the better. For example, if the PC party does stand up to its election promise and bring in the US equivalent of the 1031 exchange, than this may become a moot point and you may wish that you did claim the CCA. Or, or fellow Canadians elect an NDP government (don`t tell me it can`t happen - it does in Provincial elections all too often) and it changes the rate of inclusion to 100%... you get the picture
I would claim the CCA - defer taxes whenever you can
Yevgeni
I would claim the CCA - defer taxes whenever you can
Yevgeni
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QUOTE (mcgowan @ Mar 15 2009, 08:44 PM) ...
However, you would also pay tax on the $20000 recaptured Capital Cost Allowance, thus paying tax on $20000.00 in one year rather than on $2000.00 per year over 10 years.
and ? .. pay same taxes 10 years later .. isn`t this better ?
However, you would also pay tax on the $20000 recaptured Capital Cost Allowance, thus paying tax on $20000.00 in one year rather than on $2000.00 per year over 10 years.
and ? .. pay same taxes 10 years later .. isn`t this better ?
QUOTE (thomasbeyer2000 @ Mar 15 2009, 11:53 PM) and ? .. pay same taxes 10 years later .. isn`t this better ?
Just concerned that the $20000 hit (in this example) in one year might bump them into a higher tax bracket. It all depends on the total on line 150. In our case taxable income for 2 of the 4 partners is very low right now, so the $2000 per year now may not be taxable. In 10 years this situation might be different as they hope to own several more properties by then producing more income.
It`s all about tax planning!
Just concerned that the $20000 hit (in this example) in one year might bump them into a higher tax bracket. It all depends on the total on line 150. In our case taxable income for 2 of the 4 partners is very low right now, so the $2000 per year now may not be taxable. In 10 years this situation might be different as they hope to own several more properties by then producing more income.
It`s all about tax planning!
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Thank you, I found this post very helpful.
Would you please recommend an accountant who specializes in real estate and has REIN members as clients?
Dejan Ristic
Would you please recommend an accountant who specializes in real estate and has REIN members as clients?
Dejan Ristic
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QUOTE (mcgowan @ Mar 16 2009, 07:21 AM) ...they hope to own several more properties by then producing more income.
It`s all about tax planning!
properties usually do not produce enough income if depreciation is taken into consideration .. so the rule of thumb is: use CCA to bring taxable income to 0 for the year.
It`s all about tax planning!
properties usually do not produce enough income if depreciation is taken into consideration .. so the rule of thumb is: use CCA to bring taxable income to 0 for the year.