Hidden Costs on Real Estate Proformas

Too many people are missing costs on their real estate proformas. Don't be one of them!

Principle pay down on your mortgage is taxed as income…. you better be prepared for it! Let’s review at what it could look like.

Real Estate Proforma Hidden Cost Example

$๐Ÿ’๐Ÿ๐Ÿ’/๐ฆ ๐ข๐ฌ ๐ก๐จ๐ฐ ๐ฆ๐ฎ๐œ๐ก ๐ฒ๐จ๐ฎ ๐ฐ๐จ๐ฎ๐ฅ๐ ๐ฅ๐ข๐ค๐ž๐ฅ๐ฒ ๐ฉ๐š๐ฒ ๐ข๐ง ๐ญ๐ก๐ž ๐ฌ๐œ๐ž๐ง๐š๐ซ๐ข๐จ ๐›๐ž๐ฅ๐จ๐ฐ (๐ฒ๐จ๐ฎ๐ซ ๐Ÿ๐ข๐ซ๐ฌ๐ญ ๐ฒ๐ž๐š๐ซ, ๐ญ๐ก๐ž ๐ง๐ฎ๐ฆ๐›๐ž๐ซ ๐ ๐ž๐ญ๐ฌ ๐›๐ข๐ ๐ ๐ž๐ซ ๐ž๐ฏ๐ž๐ซ๐ฒ ๐ฒ๐ž๐š๐ซ ๐š๐Ÿ๐ญ๐ž๐ซ

If you owned a $1,000,000 property in a holding company and put 20% down you would have an $800,000 mortgage. If the mortgage was at 6% with a 30 year amortization you would make $57,556 in mortgage payments and pay down $9824 of principle your first year (surprising eh?!).

In a holding company filing in British Columbia income from real estate is taxed at 50.67%. Your first year that would mean owing $4977.88 in taxes on your principle pay down. Monthly this breaks down to $414.8.

It is important to note that this cost will grow every year. Your 5th year of ownership you would pay down $13,251 in principle which would break down to $559.53 per month.

Your 20th year you would pay down $32,519 in principle which would cost $1373 per month in income taxes.

How to Offset Rising Real Estate Costs

1) Re amortize your mortgages over time

This can keep your principle pay down lower (which is not necessarily a good thing) and lower your annual income tax costs for the property.

2) Work with a good accountant and discuss methods of reducing your annual income taxes.

An example would be depreciating your property. This has benefits and disadvantages and should be considered cautiously and with professional guidance.

Remember, when you are paying taxes on principle pay down you are paying taxes on profit! This is a good thing so donโ€™t lose sight of making money! The challenge is that paying off your mortgage creates equity in your property. Outside of niche mortgage products you generally cannot access your equity without refinancing (which can often be expensive) or selling.

**The example above is for a holding company which has the highest tax rate on income generated from real estate. For investors owning in their personal name your principle pay down will be taxed at your marginal tax rate.

Find out more

As mortgage brokers we are on your team. Our job is to understand your needs, plans and wants in order to understand your mortgage needs. We then look at a number of lenders to find the best products and solutions for you.

During our time in the industry we have learned a number of tips and tricks to help you save money and to pay of your mortgage faster.

If you have any questions or would like a customized mortgage plan let us know!

You might also enjoy

What is Reverse Amortization?

Unfortunately, we have been seeing these reverse amortization situations occurring more and more frequently so let’s examine the scenarios where it happens and discuss what can be done about it.