Personal tax in cash flow analysis of a rental property?

[Patrick Cartier]

Hello everyone,

I am new to real estate investing and I am looking to purchase a rental property. Looking at 4-6 units properties. I would use one of the units as my personal residence and rent out the others. 

Having a positive cash flow is key to me since I want to minimize my risk. 

Here is my question: When analyzing properties, should my cash flow include the personal taxes I will have to pay on the net income generated by the property? In my cash flow calculation, I assume the unit I would use as rented out at market price. I live in Canada and my personal tax rate is nearly 50% considering my personal income. When I include the personal tax component, finding a property with a positive cash flow seems almost impossible...

Thanks.

[Roy N.]

@Patrick Cartier

If you hold your property in your own name, you could use a reverse gearing on your property to reduce your income from other sources (i.e. your day job) for tax purposes.   

If you hold your properties within a corporation, a property with a loss will offset net earnings from other properties lowering the taxable income of the company, but cannot be transferred to you personally {company is its own person under the law}.

If you claim a capital cost allowance (CCA - depreciation in CRA speak) deduction to lower your taxable income, then at the point in time when you divest the property, the CRA will recapture that CCA deduction and it will appear as income in the year of sale. 

If you are personally in a high marginal tax bracket, it may make more sense for you to hold your properties in a company.  Investment income (including rent) is considered passive income by the CRA and is not eligible for the small business reduction ... as a consequence it is taxed at the full corporate tax rate (which is about the same as your marginal rate).

I would find yourself a good accountant and attorney, lay out bullet list of your real estate objectives and the will assist you in choosing the correct ownership structure for today which an morph into your future needs while mitigating your tax exposure in the process.