Every Podcast tells me the answer is yes, however every time I talk to my accountant he says that depreciation isn't always worth claiming. He mentions that when you go to sell the property or if you pass away your kids will have to pay the depreciation recapture. Basically cancelling out any benefit it has. Am I missing something, or is there a follow up question I should be thinking about?
Thanks in advance,
Thanks for posting, I have the same question. I've heard not to claim it unless you are definitely holding the property for the long haul … absolutely no plans to sell. One part I'm unclear on is that I've heard the recapture can be substantially more than the tax benefits received. Particularly in the case where the property has appreciated substantially (like a lot of our properties have, in Canada). If it was simply that you have to repay what you received, then the answer would be pretty simple: a dollar in your pocket today is better than tomorrow, so you might as well claim it so long as you are fully prepared to pay it all back upon selling.
I would love if an accountant would chime in. For example, let's say you purchased a rental property 10 years ago for $500k and have claimed max CCA (depreciated) for the property each year. Today the property is worth $900k and you want to sell it. Let's say the refund you got was $2500 each year for the depreciation expense. How much would the CCA recapture be?
Know nothing of Canada tax statutes, but often investors will claim depreciation NOW to improve their short-term cashflows for reinvesting - even if they will have to pay more when they sell the property.
It's no different than borrowing money to buy a rental property - you're paying interest on the loan, so you can buy now.
I believe in some cases it is not like a loan on a rental property.
One accountant ran the numbers for me on a property I was selling that had appreciated >$300K and I was going to owe, in recapture, something like 2x more than what I received as tax benefit over the 4 years that I claimed it.
My hunch is that this is an area where Canada and US tax laws differ greatly. I think you really need to know the intricacies of Canadian tax law to comment on this. In the past when I've brought this question up the answer is usually "go see (pay) an accountant". Which I did. In fact I saw a few, and they all gave me different answers. It's complicated. You have to run the numbers on the recapture equation.
We always claim the maximum amount of depreciation to reduce the income that CRA can tax. This way we have more money in our pockets today. Instead of giving it to the government, we utilize these funds to keep growing and bettering our portfolio. I would rather have more money now and invest it. When we sell down the road, the recapture will come off my overall profit.
Hey @Jonny Van Dyck , I'm glad others are in the same predicament. I would love to find a Canadian Real Estate tax specialist to explain the ideal structure for Canadian Investors. I'm going to send you a DM, have some questions about the BC market.
Hey @Melanie Dupuis , I've also thought of doing it this way. It makes sense because you can invest that money today and have substantially more by the time you need to pay the recapture. Am I right by saying you have intentions to hold for 10+ years on these properties?
@Warren Marshall You are correct! we are buy and hold investors. However we have sold some properties in a shorter time period, and still applied the same concept.
@Melanie Dupuis and I'm assuming those properties you sold you were depreciating along the way? Once the sale was done you obviously still thought it was worth it?
@Warren Marshall Yes it was still worth it in our opinion. The way we look at it it, the recapture that gets taken off our end profit was never really ours in the first place. The tenants paid down the mortgage, and the building apreciated in value. We made money and invested in other assetes along the way. So now if there if less at the end due to recapture, it's just the cost of doing business this way.
@Melanie Dupuis I appreciate that point of view. That helps a lot, just gotta make sure that I invest the depreciation benefit so that at the end I'm ahead of the game vs scrambling to pay off the extra expense. Am I right by saying Its almost like having an interest free loan that has to be paid off at the time of the house sale?
Really appreciate the feedback