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ALWAYS CONSULT YOUR INVESTMENT PROFESSIONAL BEFORE MAKING ANY INVESTMENT DECISION

June 2, 2017 | Sharing it

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

 

It was only five months ago that Frank and his wife hatched and executed the Big Plan.

They paid $900,000 – all of it borrowed (three hundred on an equity loan and the rest mortgaged) – to buy an Airbnb house. That came after an unbelievable dive into the sharing economy. “We made more money renting out bedrooms that my wife did working full-time,” he gushed. “So we decided to really get into this thing.”

It’s something a ton of people are discovering – cash through apps, competing with hotels where quality rooms (in Toronto or Vancouver, at least) start north of $600 a night. Ditto for those who hop in their cars and become Uber chauffeurs. And now there’s Rover.

The driveway-sharing service makes sense, of course. Drivers check their app for the closest parking pad, laneway or driveway, dump the car, pay two or three bucks an hour online and never worry about a parking ticket. The property owner gets cash for something that sat idle. The local parking lot guy gets screwed.

The sharing economy is spreading like a virus. Bad news for all those taxi drivers and motel operators, but it’s putting a lot of new cash into the pockets of homeowners. Most of them are not as radical as Frank, of course, nor as dumb.

Not only did he pay way too much for a house (in a bidding war, no less) close to the peak moment in the market, but he wandered into a bureaucratic quagmire. There are zoning restrictions meant to prevent someone from opening a hotel in the house next door to you, and F ran smack into them. The city shut him down after less than eight weeks – on complaints from the neighbours. And now the CRA says it intends to audit (his wife says she suspects it was the bylaw guys that tipped off the revenuers).

So Airbnb and Rover raise interesting questions about taxation and real estate.

First, the money that creepy strangers pay to stay in your spare bedroom and use your shower is not without strings. It must be reported, added to your other income, and taxed at your personal marginal rate. Trying to avoid that can result in serious interest and fat penalties. And since Airbnb is now working with provinces like Ontario and BC, there’s a good chance you’ll be nabbed.

Of course, you can also deduct from this extra income some of your minor household expenses – but be careful how many services you provide to a guest. For example, if you put on your sexy French maid’s outfit and clean the room daily, or dish up meals, the CRA may reclassify the activity as a business. Now you have to worry about stuff like HST, and file more elaborately (and expensively).

Also be careful about losing a hunk of your precious PRE – principal residence exemption. Leasing out one bedroom if you have four of them is not a problem. But if you rent three, trouble. Ottawa says the PR status will remain intact if the rental area is relatively small – certainly less than 40% of the total space. Of course, any structural changes made to a property in order to generate income – whether from an Airbnb dude, a monthly tenant or someone dumping a Kia in the driveway – immediately compromises the capital gains exemption.

That would include a separate entrance to the leased space, the building of a kitchen or a kitchenette, installing a new bathroom or walling off a parking spot. By doing such things you’re commercializing your digs, and the results could be costly when you sell. Some people have walked right into this tax trap by claiming CCA (capital cost allowance) for Airbnb renos. So don’t.

So here are the rules.

Include all the money you receive from this stuff in your taxable income. That also allows you to deduct reasonable costs. If you don’t, and are audited, may Allah help you.

If you’re renting out a hunk of your house or lot, ensure it’s a small hunk and in no way compromises the overall residential nature of the property. By definition, the income-producing activity needs to be ‘incidental’ to the home.

Do not make any structural changes of any kind to facilitate the clients. And don’t claim CCA if you do.

Protect yourself with extra insurance. If the parked Kia blows up on your front lawn (they’re always doing that) or the nice man visiting from Pittsburgh turns out to be a pyromaniac, chances are your homeowner’s policy will choke.

Finally, never be like Frank. The only thing he can do with that house now is rent it out as a single-family residence, which means he’ll forever be in negative cash flow and be subject to capital gains tax on any profit when he sells.

The moral: be very careful what a moister tells you. Apps can kill.

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June 2nd, 2017

Posted In: The Greater Fool

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