As with many things in life, in Real Estate Investing, “Timing is Everything.”
Although that may seem obvious, what does that actually mean for the average investor that is seeking to add the missing piece to their real estate investment portfolio?
Let’s have a look at an example, that will make it clear that for example right now is a very good time to buy your investment property, if that is what you were planning to do.
Here are some assumptions for this example:
- You have decided that you want/need to make an investment in a Cash-Flow generating piece of real estate over the next 6 to 12 months.
- You have one or more properties in mind that based on your criteria make sense for you to pursue.
- You have the financial resources and access to funding reasonably secured.
In other words, you are primed and ready to buy your (next) investment property, but something is holding you back…..
Just to further clarify, if the above outlined 3 part situation does not apply to you, you are likely best off to not rush into anything and connect with us to see how we can assist you in the future.
Once you are confident that the above 3 pieces of the puzzle are in place, deciding when to make your move can make a huge difference in the return on investment of the property immediately and for some time to come….
The most compelling reasons to consider is one that you likely are aware of :
Capital Cost Allowance (CCA)……
Capital Cost Allowance (CCA) is the allowable tax deduction for depreciable property, (including improvements on Real Estate) that wear out over time (depreciate).
Capital Cost Allowance means that when you buy a depreciable asset, you can’t just claim the entire cost of the property as an expense on Form T2125 when you are calculating your business or professional income; instead you have to deduct the cost of the depreciable property gradually over a period of years.
As CCA applies to Real Estate, you can only depreciate the “Improvements”, not the land… Which is one of the reasons why your BCAA (BC Assessment Authority) separates your land and improvement value on your annual Property Value Assessment Notice. Secondly and likely the most important part of applying CCA for real estate investors is “The Half-Year Rule”
The Half-Year Rule & CCA
The Half Year Rule states that in the year of acquiring or making additions to a property you can typically only claim CCA on half of the normal depreciation percentage. (check out this link for details as it pertains to buildings http://www.cra-arc.gc.ca/tx/bsnss/tpcs/slprtnr/rprtng/cptl/dprcbl-eng.html )
Most buildings/improvements will fall under class 1 or 3, but check with your accountant). Here is why Real Estate Investment Timing matters at this time of the year…..
- Buy and complete your real estate investment purchase in 2013, you get to use 50% of the allowable CCA (2 or 2.5%) for your 2013 returns. And come January 01, 2014 you can use the full CCA for 2014 (4 or 5%).
- Buy and complete your real estate investment purchase early 2014, then the half year rule applies for all of 2014, and you can depreciate the full CCA starting 2015.
Let’s fill in some blanks (and check these numbers with your accountant, as you can not use CCA to create or increase losses on your return).
Say you bought a property worth $ 800,000 with a land value of $ 400,000 leaving $ 400,000 worth of improvements, let’s assume that the building etc. is a class 1 CCA situation, then you could use 2% in the year of purchase ( $400,000 X 2% =$ 8,000) and 4% on the remainder the following year ($ 392,000 X 4%= $ 15,680).
For most people (but again check with your accountant) getting a tax deduction sooner rather than later makes more sense.
In addition, owning an asset for such a short time and getting to claim 50% of the CCA, just feels like a 2 for one…
You get to claim now and next year rather than having to wait…
There are a few other reasons why savvy investors are buying real estate this time of the year, again assuming that the initially mentioned 3 key parts are in place….
Here are just some of the reasons why this time of the year often is sought out by investors to buy a solid real estate investment.
- Often Sellers of investment type property, also prefer to sell now rather than later for their tax reasons…
- Some Sellers are more motivated emotionally to sell now.
- There are fewer buyers around due to the holidays, so less competition, may make for better deals.
- Most Sellers will make the assumption, If we don’t sell now, it might be a while before buyers will take note.
- Because it is slower in the real estate market, resources and services like inspectors, lawyers etc. may have more time available (although some close for the holidays)
- For existing revenue property it is less likely to have turn over during the winter months, hence less disturbance in the transition of ownership.
- If Buying Fixing and reselling was a consideration, having a few months before the height of the spring selling season starts might be enough to add substantial equity without added cost.
As you can see, Timing is Everything, when Investing in Real Estate, Getting your investing timing right and you stand to gain huge benefits, getting it wrong, reduces your benefits of investing in real estate.
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