Peter Boys, Boys Financial Services

Tax Benefits of Home Ownership

home ownership

The biggest investment most of us will make in our lifetime is our home. While providing a roof over our heads, it’s also likely to increase in value, which can be a significant source of tax-free gain. When we sell it for more than what we paid for it, the profit is not subject to tax, thanks to CRA allowing an exemption on profit realized on the sale of our principal residence.

This is a good reason for young Canadians to enter into home ownership as soon as they can save enough for a down payment. It’s also a good reason for empty-nesters or retirees to stay living in the family home. If it’s necessary to free up equity to provide a source of additional retirement income, downsizing to a smaller house or condominium may be preferable to moving into a rental unit.

Condominium ownership however comes with ever-increasing condo fees, plus the likelihood of substantial future costs for repairs or renovations to common elements. It’s also important to consider that that condo ownership is commonly referred to as “paint in”. In other words, you only own the interior, therefore there may be little or no increase in the value of your investment.

Continued home ownership in retirement years may only be possible if you can afford to have this much equity tied up in real property and you can handle the upkeep. Mandatory expenses such as property taxes, and dealing with the cost and hassle of maintenance and repairs can become burdensome.

It’s hard to beat one’s home as a major tax-free investment, generally with far less volatility than the stock market. Compare this to for-profit investments, where half of the profit from the sale of real estate or other capital investments is taxable at one’s marginal tax rate. Not having to pay tax on the sale of one’s principal residence can result in huge savings over time.

Canadians owning more than one home can designate principal residence status to whichever home they wish for any given year. The property one designates as such normally would depend on the market value history for each property. Usually, the property with the largest capital gain would be designated the principal residence to minimize the tax hit.

The argument for home ownership as an investment is tempered in some locations with today’s sky-high home prices in places like Toronto or Vancouver, where renting might be cheaper for some people. And with Canada now in a recession, it may make sense to wait and see if home prices moderate.

Financing a home has become a complicated process. Do you choose an open or locked in mortgage? Which amortization term do you pick; 5 10, 15, 20 or 25 years? The interest penalty to break a locked-in term used to be three years, but banks now go by the interest differential which is all the interest you would pay to the end of the term. This can make it very costly to switch mortgages.

If you are contemplating buying a home, be sure to check with several lenders, plus check out some of the innovative offerings available through “virtual banks” that offer greater flexibility, especially for those with 60% or more equity in their home. And always read and understand the terms and conditions you are agreeing to!
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