Life by Design

Summary In this episode of the Life by Design Podcast, Jessilyn and Brian Persson discuss the tax advantages associated with real estate investing. They emphasize the importance of understanding how to leverage personal residences, the concept of return of capital, and the significance of maintaining good bookkeeping to maximize deductions. The conversation highlights the need for consulting tax professionals to navigate the complexities of tax laws and strategies effectively.   Chapters 00:00 Understanding Tax Advantages in Real Estate Investing 07:04 Leveraging Personal Residence for Investment 09:50 Return of Capital and Tax Strategies 12:36 Maximizing Deductions and Bookkeeping for Rental Properties   Contact Jessilyn and Brian Persson | Weekend Wealth Investments:  Website: weekendwealth.caInstagram: weekend.wealthFacebook: Weekend Wealth InvestmentsLinkedin: Weekend Wealth Investments  Transcript Jessilyn Persson (00:00) Welcome to the Life by Design Podcast, where Jessilyn and Brian Persson, struggling to align your financial goals or confidently invest in real estate as a couple,   Brian Persson (00:18) That's why we created this podcast and the Riches Relationships and Real Estate program to help you build wealth and strengthen your relationship. Visit weekendwealth.ca to take our quiz and discover your real estate investor type. Let's create the life you deserve together.   Jessilyn Persson (00:36) In today's episode, we're discussing a few of the tax advantages you can access when it comes to real estate investing. For us, taxes are our number one household expense above our mortgage or any other category of expenses. In Canada, we would assert it is the same for everyone. So if you can reduce that expense via real estate and create an investment at the same time, you should definitely do so. First, a quick disclaimer. This episode is for informational purposes only and should not   be considered tax advice. The insights shared are based on our personal experiences and may not suit everyone's situation. We strongly encourage you to consult a qualified tax professional before making any financial decisions. So the first one we wanna chat about is your personal resident mortgage because most people are homeowners and they have a mortgage and their goal is to pay it down and be mortgage free. But as we've discussed in other episodes,   There are things you can do with that mortgage that will create an asset and passive income for you instead of just sitting on something that is considered a liability.   Brian Persson (01:46) Yeah. And it's considered a liability because you're paying for it with after tax dollars. your renters are not paying for it. No one else is paying for that mortgage for you. So how do you turn your personal residence, your mortgage on your personal residence from a liability to an asset? Well, in Canada, the tax law allows you to borrow money and   put it into an investment which has the likelihood of creating cashflow. And when you borrow that money, you can write off the interest of what you've borrowed. So if you borrow money from your personal residence, i.e. your mortgage, then you can write off the interest of that mortgage when you invest it. So for us, we chose one of the simpler strategies just to keep our life simple.   And that is we, every once in a while, when the mortgage gets paid down enough, we will borrow a lump sum of money from our mortgage and we will put it into an investment. And that way we have a single transaction. have one borrowed chunk of money and we have one invested chunk of money. And it is very, very easy to keep that paper trail clean for the revenue agency. And if an audit comes our way, we have no problem with it.   Jessilyn Persson (03:06) Right, so we, ⁓ just to maybe dig just a little bit deeper, we obviously have a house and a mortgage that we had originally anticipated paying down. We've shared this multiple times that we were, I think one, maybe two months shy of being mortgage free. Well, we decided we want to refinance. We're going to pull money out and buy another property or two in this case. ⁓ And so we pulled it out. We did a HELOC, so a home equity line of credit.   and we pulled a lump sum and bought a property. And like you said, keep the paper trails clear. And then we were able to write off the interest against the lump sum we borrowed. So anything that was still owing on our personal property, that was no write off. We still have mortgage payments for our personal portion of the property. the borrowed portion for an investment, to be clear, you can't borrow it and go buy a car. That's not not CRA improvement.   Brian Persson (04:04) Yeah, exactly. You said it. You said it exact. ⁓ The only the portion that you've borrowed from your personal residence can be written off. ⁓ The interest can be written off. And that's why you have to have a very, very clean paper trail because if the Canadian revenue agency comes in and audits you and they can't tell the difference between what you're paying personally and what you've borrowed, then you might be in some tax trouble.   And that's why we like this strategy is because it's just a very, very simple, clean paper trail. ⁓ it also just happens to work really well with private equity, ⁓ which we like to invest into, ⁓ because more often than not, need larger, larger lump sums of money. can't just put $500 into private equity. but, ⁓ because you need the larger amounts, it works really well to just let it build up, take that amount, put it into a single investment.   Jessilyn Persson (04:59) Yeah, we love this strategy. We've used it over and over on multiple properties. ⁓ It's a fantastic way to get into bigger investments and to just start building your wealth ⁓ for retirement or whatever that looks like because not everyone can put away a lot, but if you're almost mortgage free or have a big chunk of equity, you can pull that out now. Think about that. You're borrowing money from the bank to buy an investment for your future.   instead of sitting on a, and you're still in the house that you own and love. It's a win-win, people.   Brian Persson (05:35) Yeah, one of the biggest ⁓ mental hurdles for people in with the strategy in general is that they, don't want to pay any more on their mortgage than they have to. But if you can imagine this, if you're generating, say your mortgage, mortgage rates nowadays are around 4%, but your investment can make 7 % while you now are clearing 3 % total on top of your total, like what you've invested. Plus the interest.   that you are paying that 4 % of interest that you have to pay against your personal residence is tax deductible. So if you're in a nominal tax bracket of 30 to 40%, well, that interest gets deducted by whatever amount of interest you paid per year against 30 or 40 % of your personal tax. And so you've saved money on your personal taxes and you've gained a 3 %   interest advantage on your investment. So it's win-win everywhere, but the hu...