As real estate prices continue to increase, man are asking the question whether it is better to rent or to own. Obviously, there are a number of intangible factors that are important. The tangible factors are of course money and the economics of investment. The economics of investment are influenced by taxation. As real estate professionals you are called upon to advise your clients. Interestingly one of he most important questions is to know whether your client is a U.S. citizen (triggered by having a U.S. birthplace). The reason is:
1. In general Canadian residents are able to take advantage of a “tax free capital gain” on the sale of their principal residence; and
2. Those Canadian residents who are deemed to be U.S. citizens are NOT entitled to this “tax free gain”.
Therefore, investing in a principal residence is less beneficial for U.S. citizens living in Canada (actually U.S. citizens in Canada suffer adverse tax consequences from investing in mutual funds, TFSAs, many pension plans, etc. (Therefore investment advisers should first ensure that they are NOT dealing with a U.S. citizen when giving advice).
Now, U.S. citizens are entitled to the first $250,000 (not much by Toronto standards) capital gain on the sale of a principal residence tax free. So, if a home is owned by two U.S. citizens then the exemption would be $500,000.
I came across an old but very interesting analysis of the “to buy vs. rent analysis for U.S. citizens.
The analysis includes:
Let’s say you will sell the house at the end of the loan. If you are married, you get the first $500,000 appreciation tax free, but the rest is taxable as long term capital gains. If we fix our other assumptions, and change the home appreciation rate, we will get the chart below. Interstingly enough, the breakeven point for buying a house is around 5%. In fact, I actually assumed a starting rent of $1800 a month, which is quite high in today’s market. If you are willing to rent at a lower standard, the breakeven point will be even higher.
You can read the complete article here.