Tax Write-off Implications on Real Estate Investing

Assuming a 30.5% marginal tax rate (the common one in Alberta for being between $45.9 – 91.8K/year), every $10000 write-off/loss results in 3050 savings. However, now the average 2-year income metric used by mortgage lenders is 5750 lower, after the +15% gross-up provided by businesses.

Monthly credit room is decreased by 192/mo. (or 211 for excellent credit @ 44% TDSR).

With current mortgage rules, this is 34600 (38000 @ 44% TDSR) less mortgage room.

Following the previous blog post of an anticipated 77% ROI with 20x leverage, this implies a 1332 (1463) less return. With a traditional 5x leverage investment and its 24.2% ROI, this implies a 1675 (1839) less return- though the initial cash required is 4 times as much.

So, from the real estate investing perspective, the actual savings from the tax write off is 1718 (1587), not 3050 (or 1375 (1211)).

If we jump another tax bracket, increasing the marginal tax rate by 5.5%, savings from write-off increases by 550.

Conclusion: The write off advantages are not as good as you think. Better than not getting anything back, though.


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