As 2016 draws to a close, there is still time to complete your mortgage before year end and take advantage of today’s historically low (but rising) rates. With holiday parties and the busyness of the festive season starting earlier and earlier each year, mortgages may be the last thing on your mind at this point. However, there are 3 compelling reasons you may want to squeeze in your mortgage refinance or one more property purchase this in before year end and get your financial house in order before the new year:
1. Tax Deductibility
2. Depreciation
3. A fresh start for 2017
Reason #1 – Tax Deductibility
The first compelling reason to complete your mortgage before year-end is that transaction costs may be tax deductible and thus claimable against taxable income on your 2016 tax return if completed before December 31st of this year. Generally speaking if you are refinancing or borrowing for investment purposes, the cost of that borrowing is tax deductible. Of course we cannot give tax advice and recommend you speak with your accountant on what can be deemed deductible, however a quick look at CRA’s website should sufficiently confirm this to be generally true.
Right now your after tax cost of borrowing on a five year fixed rate mortgage could be lower than 1.2%… meaning your after tax rate of return need only be more than 1.2% to be getting wealthy with other people’s money. You don’t need a fancy finance education to beat the math in this interest rate environment.
However, the point remains – if you know it is possible to create a tax deduction for the 2016 tax year instead of the 2017 tax year – you’d want to do that right? After all, we know a dollar today is worth more than a dollar tomorrow (time value of money principle). If you’re refinancing for investment purposes creating a present year tax deduction means more money in your pocket to invest in 2017. For most transactions and borrowers this would put an extra $600 in your pocket assuming $1,200 of transaction costs and a marginal tax rate of 50%. For any refinance with a breakage penalty to access additional capital for investment that benefit will be greatly magnified by your after tax savings.
Reason #2 – Capital Cost Allowance
Another key benefit to closing before year end applies only to the purchase of an investment property (or specifically a subset of depreciable capital assets). One of the benefits of investing in real estate is the “phantom” expense known as depreciation or “Capital Cost Allowance” which creates a current year tax deduction. In the year you acquire rental property, you can usually claim CCA only on half of the asset added to a class (this is often referred to as the half-year rule). In year 2 onward you’ll be able to take claim full CCA.
CCA cannot be used to force a loss, but the real benefit is in getting the full CCA for the following year. Take for example a $500,000 rental property purchase. If the land is worth 20% (or $100,000) and the building is worth 80% (or $400,000) then you get to take CCA on the building at 4% per year. That’s $8,000 using the half-year rule or $16,000 for a full year worth of depreciation the following year – what a great shield to defer taxes on rental income generated by the rental for the year.
Of course you should seek the advice of a qualified accountant on whether or not it makes sense for you to claim CCA on your rentals, but realize there is a very real benefit to be had here – especially for those in higher marginal tax brackets like most of our clients.
Reason #3 – A Clean Slate for 2017
This reason is tougher to quantify, but can be worth a lot. Whether or not you invest in real estate, borrow to buy appreciating equities, or are simply optimizing your debt structure – the thought of starting the new year with a clean slate is appealing. Instead of worrying about getting your docs in a row (pun intended), you can worry about your new years resolution and have a fresh start to the year. Why not tie up the loose ends of a refinance in 2016 and be ready to start fresh?
If you are a real estate investor this carries even more benefit. Getting any refinances to setup access to capital completed before the holidays allow you to know where you stand with respect to available capital, allow you to know your budget for new purchases, and let you brainstorm and network throughout the holiday season about what’s next for you in 2017 and beyond. Instead of rolling into 2017 with looming questions around what’s possible you’ll already know and can focus on finding your first good deal for the year.
There’s Still Time!
If you could benefit from tax deductibility, accelerating your Capital Cost Allowance, or simply heading into 2017 with a clean slate and ready to work your financial plan – then contact our team today!
There is still time to complete your mortgage before the holidays. Don’t sit on the fence, take action on your financial goals and call our office today to discuss how we can help at 1-855-410-9905 or email ClientCare@CalumRoss.com