Renting my condo
December 5, 2013 9:53 AM   Subscribe

I have owned a condo apartment for five years. I do not have a mortgage. My parents gave me the money to pay for it cash, and I pay them back at a rate $800 a month, no interest. The condo was not a gift as I'm fully expected to repay my parents. I suppose the "gift" was a loan with no interest. I want to move out and rent my place out. More details inside.

My partner and I would like to purchase a place together, and since other condos the same size in my building have been renting out for almost double what I pay my parents per month, we figured that it would be smart to rent my place out and live at his house for about a year so we can combine our household expenses and save up to buy a house/duplex together. At first, I thought my contribution to our savings would be the hefty profit I'd be making from renting my place out.

... except, my father mentioned in passing that since my condo is paid off in the eyes of the bank, I might end up being taxed on the entire rental income, minus expenses. A friend of mine who has a condo as well, but also has a mortgage, said that she deducts her mortgage (or the interest of her mortgage?) as an expense.

I don't know, I am very confused. I know nothing about this, and I'm not even sure what to search for on Google that might lead me to the proper information. Am I at a disadvantage from a tax standpoint if I rent out my apartment? What part of the rental income is taxable? Is renting out my place even the best idea in this situation? Are there any resources that can help me figure out exactly how much money I'm going to have at the end of every month?

I strongly prefer not to sell my condo as it doesn't cost me very much to keep, it's been going up in value steadily in the past 5 years, and it's in a very desirable location. But... if it really doesn't make sense to keep it, I am - reluctantly - willing to let it go.

Looking for some direction in this situation!

BTW, I live in Canada.
posted by ohmy to Work & Money (18 answers total)
 
You would need to report any rental revenue you receive as income on your taxes, net of any allowable expenses. Because you own the property outright, you do not have any mortgage interest to deduct (which would have reduced your net income). Your friend likely is only able to deduct her mortgage interest, not the principal she pays on the mortgage. You can deduct other reasonable expenses, such as condo fees, utilities, maintenance, etc.

You can refer to the CRA guide found here for some more details.

I can't comment on whether it would still be a good idea to rent out the condo. However, you would only be paying income tax on the net rental income you receive. Depending on your tax bracket it could still be a good idea.
posted by barnoley at 10:04 AM on December 5, 2013 [1 favorite]


Is renting out my place even the best idea in this situation?

No, I don't think it's the best idea. To be quite honest, the very basic questions you are asking suggest to me that you should not be making financial decisions about what to do with your condo without becoming more familiar with how taxes work and the expenses/revenues associated with renting a condo.

I might end up being taxed on the entire rental income, minus expenses.

Yes, you will be taxed on rental income because it is income like any other. However, that doesn't mean the money "disappears", just that you won't be able to keep 100% of the money. Instead, you'll have to pay your marginal tax rate from that money. Again, if you can't immediately say what your marginal tax rate is, you shouldn't be considering renting your condo right now.

I know nothing about this, and I'm not even sure what to search for on Google that might lead me to the proper information.

I'd suggest an accountant.
posted by saeculorum at 10:09 AM on December 5, 2013 [14 favorites]


Since you can rent it for almost twice what you're paying, I'd say it's probably a pretty good idea: it's unlikely that the tax would eat up as much as the other half of the rental fee! But, of course, talk to a pro: specifically, get a quick consultation with a tax accountant.

As for the actual renting-it-out part: unless you want to deal with the renters yourself --- and I'd recommend against that! --- most real estate companies can provide rental managemnet services, from vetting prospective renters to collecting the rent to dealing with maintainence & upkeep. Again, if you can rent it for twice what you're paying your parents, it'd probably be well worth it: rental income minus 1/2 to parents; other half of the rent minus taxes & management fees; I'd bet you'll still come out comfortably ahead.
posted by easily confused at 10:13 AM on December 5, 2013


Just a quick note on something you mentioned in the question. The loan from your parents will still look like a loan to a mortgage company. It will certainly look like an outgoing. In short: it's your call if you declare it to the mortgage company (and look a the penalties for failing to disclose important information) but if you do it will affect what you can borrow.
posted by MuffinMan at 10:45 AM on December 5, 2013


Response by poster: For clarification, I'm not trying to avoid paying taxes on the rental income or find some kind of loophole.

It's that I have an expense of $800 that is not an "official" monthly payment, but IS a condo payment (just to my parents instead of the bank), and I'm trying to understand how that relates to the concept of "rental income" and what the tax implications are. Is this considered just a random expense unrelated to my property because there is no mortgage? Can I declare it as an actual loan?

Also, no rental caps in my building.
posted by ohmy at 10:47 AM on December 5, 2013


If you receive a no interest loan from the bank, bought a condo with it, and then paid off per month your loan, you would be in the exact same position.

The income part is entirely seperate from what you are paying part. If you collect 1k in rent, and paid 1500 for the no-interest loan, well, that is still 1k in income you would have to declare. Same goes as if you collected 1k in rent and paid 500 for the loan.

AFAIK, interest is what you can deduct from your taxes, not the payment.

From wikipedia:
Canadian federal income tax does not allow a deduction from taxable income for interest on loans secured by the taxpayer's personal residence. But homes used in businesses as a landlord who owns a rental residential property can deduct interest as any other reasonable business expense

You will deduct all that you pay interest to finance your condo if you rent it out. Which in this case would be 0.
posted by MisantropicPainforest at 10:52 AM on December 5, 2013 [1 favorite]


Best answer: To try and explain this generally (and without regard for the specifics of country's tax laws).

You have to pay tax on income. It's only a percentage of your income, so if you earn more money than before, you'll always take more money home than before. That applies whether it's your salary or your rental income.

Because (in general) it doesn't make sense to tax people on money they needed to spend in order to earn money, you can subtract some expenses from income before paying tax. If my shop takes £200, but the shop rent costs £50, I only pay tax on £150. So it's not worth my while to go hunting for extra expenses. If I spend another £20 on frivolous shit, that lowers my tax obligation slightly but I have just spent £20 for no reason! Not paying mortgage interest at all is way better than paying mortgage interest but not paying tax on that amount.

The cost of paying your parents back is a massive red herring, because it's not an expense at all. Say you owe your parents $100,800 right now. Say you also have $800 in the bank. So in total you have -$100,000 (adding the two numbers). If you were to give the money in the bank to your parents you would have nothing in the bank, but you would only owe them $100,000. You would still have -$100,000 overall. YOU HAVE NO LESS MONEY. Thus, this is not an expense.
posted by emilyw at 10:54 AM on December 5, 2013 [3 favorites]


Best answer: Even if you declared it as an actual loan, repayment of principal is not a deductible expense. If part of that payment was interest, it would be income to your parents and they would need to pay tax on it.

As an exercise, pull out your taxes from last year and work through them again, this time with estimated rental income and expenses (property taxes, condo fees, management expenses and repairs). This will give you a better picture.
posted by TORunner at 10:56 AM on December 5, 2013 [2 favorites]


Unless there is a giant exception in Canadian tax law, you may also be liable for income or gift taxes on the interest-free amount of the loan that your parents gave you. In other words, because they're giving you a loan at a sub-market rate, the interest that you would have paid had you gone to a bank and gotten a market-rate loan is effectively income that your parents gave you, and can be taxed. Whether or not you actually owe anything depends on the gift maximums where you live and perhaps various real-estate tax exemptions ... you definitely need to speak to an accountant or licensed tax preparer in your area. But just because you are paying back the principal of the loan doesn't mean that it's "not a gift".

I don't think the rental idea is necessarily bad, but you really need to get the tax issues straightened out first, and not by asking strangers on the Internet. You could potentially have a significant tax liability, and that is not the sort of thing you want to discover after the fact.
posted by Kadin2048 at 11:02 AM on December 5, 2013 [2 favorites]


Also, you may want to look at total assets. If your condo is worth $100,000 and you still owe your parents $50,000, you have a net worth of $50,000. Next month, since you have paid down your debt, you owe your parents $49,200 and you have a net worth of $50,800.

You will have a higher level of net assets at the end of the year. Take that into account in your calculations.
posted by TORunner at 11:06 AM on December 5, 2013


or to put it another way, if you rent out your place, even if the rental income after tax is MUCH LESS than your payment to your parents, you are in profit, because your tenants are still helping you to pay off your house.

An interesting problem would be if "staying at your partner's place" involved paying him more in rent than you are making in profit, and then you were to split up before buying a house. In that case you really would be out of pocket.
posted by emilyw at 11:08 AM on December 5, 2013


There will likely be an income tax on your condo when you do sell it is no longer your primary residence and is only a rental unit.

If you were to sell the condo now (imaginary numbers) for $300k, but you bought it for $150k, then the extra $150k would not be taxed, since it wasn't realized as income, but merely as a fact of living in your primary residence.

If you were to rent the condo and sold it in 10 years, then the 150k would be taxed as income -- potentially $30k in taxes? But then again, perhaps you will make over $30k over the 10 years of having it as a rental, so it will be even money.
posted by LeanGreen at 12:30 PM on December 5, 2013


You have to pay taxes on income- so what? You work, don't you? Isn't getting taxed income better than no income?

As long as this is okay with the owners (you parents of course), I say go for it. It's not going to COST you money.
posted by ethnomethodologist at 12:53 PM on December 5, 2013


I agree with saeculorum. This definitely requires professional advice, not a Google search. An accountant would be the right choice.

She will undoubtedly tell you that, since the loan from your parents is interest-free, none of the monthly payment to them would count as a deductible expense. Instead, what they are buying you is increasing equity in the condo, at the rate of $800 per month. Still a very good deal.

The entire rent you receive will of course be income.

The foregoing is U.S. based, by the way.
posted by yclipse at 12:55 PM on December 5, 2013


Off the top of my (Australian) head, it sounds like you should stay put, and buy another property for rental, using your (ostensibly debt free, in reality some equity/some owing) existing property as collateral.

Your new accountant, who you selected for their expertise in residential property investment, will be able to advise you of the viability of this manoeuvre, and how best to structure it.
posted by GeeEmm at 1:40 PM on December 5, 2013


Unless there is a giant exception in Canadian tax law, you may also be liable for income or gift taxes on the interest-free amount of the loan that your parents gave you.

Tax on gifts is something that varies tremendously from country to country; not specifically knowing Canadian law I would be reluctant to make any recommendation excepting to see a financial planner (which is totally, totally worth it OP. Go to a fee-based one, not one that takes commissions).
posted by smoke at 2:56 PM on December 5, 2013


Let me also throw this in, echoing commentator Easily Confused: Renting out a condo isn't fairies and rainbows all the time, either. If you don't know what you are doing, it can be a real pain in the ass. I strongly recommend that you hire a third party to manage the property for you.

(This is based on experiences from both ends of the equation. Nothing is worse than a landlord who has no clue what they are doing, or a tenant who drive you insane with never-ending requests and repairs.)
posted by Cycloptichorn at 4:17 PM on December 5, 2013


Response by poster: I spoke to a professional this weekend and I now have all the facts straight. Thank you all for weighing in!

PS: There is no gift tax in Canada.
posted by ohmy at 6:52 AM on December 9, 2013


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