Rent to Own Taxation (Part 2)

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The following is a guest post by Cherry Chan, Chartered Professional Accountant. Cherry specializes in real estate taxation and has many great posts on the subject on her blog. For more info visit Cherry’s website at: http://cccpa.ca/

In my previous blog post “Rent to Own Taxation (Part 1)“, I shared with you the (3) three streams of income from a typical rent-to-own arrangement and the criteria to determine whether the rent-to-own investment strategy is considered as business or capital in nature.  I also shared with you that if the rent-to-own investment strategy is considered as business, the investor is required to report all three streams of income as income.

In this blog post, I will continue to explain to you the tax implication if the rent-to-own arrangement is instead considered to be capital in nature.

Stream 1. Non-refundable downpayment

In a typical rent-to-own arrangement, the tenant buyer puts a non-refundable deposit down (a minimum of 5% of the purchase price at Ownership Solutions) in exchange for the option to purchase the house at an agreed price at the end of the term, usually 2 to 3 years (most commonly 3 years at Ownership Solutions).

If the agreement does not specify that such downpayment is used for the purchase of the option right, the investor is required to report it as income as the amount is non-refundable.

However, if the agreement specifies that the non-refundable deposit is to be used towards the purchase of the property at the end of the term, the Income Tax Act (ITA) allows the investor to report it as capital gain in the year he receives the money.

In most rent-to-own option agreements I have worked with, they clearly specify that the down payment is to be used to pay for the purchase. Therefore it’s most likely the investor can report it as a capital gain in the year he receives this downpayment.

Stream 2: Rent and rent credit

During the term of the rent-to-own arrangement, the tenant buyer is required to pay rent.  A portion of this rent is then credited toward the ultimate purchase price as agreed on in the option agreement. 

For the regular portion of the rent payment, the investor is required to report it as rental income. 

As for the amount of rent credit, if the agreement specifies that it is used to maintain the option right and credited towards the future purchase, similar to the non-refundable deposit, the amount can be reported as a capital gain.  Otherwise, the rent credit should be reported as income in the same year.

The investor should be careful with respect of drafting up the agreement specifically to the rent credit.  One rent-to-own expert had expressed his concern that if the rent credit was not part of the lease agreement, the landlord investor may not be able to go after this amount in case of tenant default. 

Stream 3: Purchase option at the end

If the tenant buyer decides not to exercise his option, all the reporting has been completed the year the money is received.  Nothing further is required.

If the tenant buyer proceeds with the purchase, the investor is required to do the following:

  1. For the years the investor has reported the non-refundable deposit and rent credit as capital gains, the investor is required to file an amended return to reduce the capital gain to zero.
  2. In the year the tenant buyer exercises the option to purchase the house, the investor is required to report the sum of non-refundable downpayment, the rent credit, together with the actual cash proceeds from the sale as the sale price, less the cost of the acquisition of the house as capital gain.

That’s all you really need to know about rent-to-own taxation. You should be able to determine whether your rent-to-own transactions are a business or capital in nature, and understand how to report each of the three types of income received during the transaction.

If you have any questions about rent-to-own taxation or require further clarification, please contact me (Cherry) directly.

The above is a guest post by Cherry Chan, Chartered Professional Accountant. Cherry specializes in real estate taxation and has many great posts on the subject on her blog. For more info or to contact Cherry, visit her website at: http://cccpa.ca/

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Client Testimonial Video from Kadim & Suzan

Suzan & Kadim worked with Ownership Solutions well in advance of their relocation to Ontario. After Kadim retired they decided they wanted to move to London, ON and began to research options well in advance.

Most of our clients are unable to qualify for a mortgage due to credit trouble, but this case was unique. Kadim & Suzan had great credit but already owned a home in Winnipeg which they had sold on a rent to own basis. Unfortunately that meant they were still on title (and the mortgage) for their home back in Winnipeg and that prevented them from getting another mortgage to purchase a home here in Ontario.

Seeing the benefits of rent to own at work with the sale of their own home they decided to see if the same type of strategy could work for them. They were used to living in a custom home and have 3 children so they wanted something more than the typical rental options available. They wanted something really nice and our Homeowner Prep Program allowed them to get exactly that.

Through our program they were able to shop with a local Realtor to find the right home for their family. We were able to get them into a nearly brand new home with enough space to suit their family and all the features they were looking for in a place of their own. 

Best of all we got prior approval from the funding partner to allow them to finish the basement for use as an at-home daycare which allows Suzan to enjoy her passion for working with children and the extra income it would provide. 

We know Kadim & Suzan will once again succeed with home ownership and were glad to work with them to get their family into a great home while they wait for the sale of their Winnipeg home to be completed. 

Kadim & Suzan got their keys on a lovely summer day and started making the home their own with a fresh coat of paint and some minor renovations. At closing they agreed to a brief video testimonial to share a few comments on their experience of working with Ownership Solutions.

(We apologize again for the wind noise, but the content is what counts)

If you are sick of renting and making your landlord richer every month…
If you would prefer to get your family into a home of your own…
…but face some obstacles in getting traditional mortgage financing, why not contact us to see if our Homeowner Prep Program would be the right fit for you?

If you’d like to get started right away you can fill out our online application and get pre-approved within 24-48hrs. There is no obligation, but we would love to see how we can help your family achieve home ownership.

Rent to Own Taxation (Part 1)

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The following is a guest post by Cherry Chan, Chartered Professional Accountant. Cherry specializes in real estate taxation and has many great posts on the subject on her blog. For more info visit Cherry’s website at: http://cccpa.ca/

A rent-to-own program is a win-win program for both the investor/landlord and the tenant/buyer.  It allows the investors to generate cash flow from a single family rental and provides the opportunity for otherwise unqualified buyers to purchase their homes over a period of time.

In a typical rent-to-own arrangement, there are (3) three streams of income. 

  1. Firstly, the tenant buyer pays a downpayment in exchange for the option to purchase the property at the end of the contract.  Usually the term of the contract is two to three years. 
  2. Secondly, the tenant buyer also pays rent during this contract.  A portion of the rent is used to contribute to the purchase price at the end.  This is called rent credit. 
  3. Thirdly, at the end of the option contract, the tenant can choose to purchase the property at the preset purchase price.

As investors, how do we report the income from the rent to own arrangement?

This depends on your personal tax situation.  If rent-to-own is considered as a business, all three streams of income are required to be reported as income.  If the rent-to-own investment is capital in nature, these three streams of income are reported differently.

Let’s first look at how Canada Revenue Agency (CRA) determines whether the rent-to-own investment is a business or not.  CRA looks at the following criteria when they consider whether to classify the rent-to-own investment as business or capital in nature.

  1. Is the rent-to-own transaction similar to the landlord’s “normal course of business”
    • If the landlord is a full-time landlord without any other employment income, then the rent-to-own transaction is more likely to be treated as similar to the landlord’s normal course of business.
    • On the other hand, if the landlord has other full-time employment, it is more difficult for CRA to argue that the rent-to-own transaction is similar to the landlord’s normal course of business. 
    • Be cautioned that one single factor can not be relied upon to conclude that the rent-to-own transaction is not to be considered as business income.
  2. How frequently does the landlord invest in rent-to-own deals?
    • The more rent-to-own deals the landlord has, the more likely that the CRA considers it as a business.
  3. Is this rent-to-own transaction an “adventure or concern in the nature of trade”?
    • An adventure or concern in the nature of trade is something a landlord habitually does that is capable of producing a profit, irrespective of the landlord’s own occupation.
    • There are 3 factors that CRA consider when determining whether the rent-to-own transaction is an adventure or concern in the nature of trade:
      • i.     Whether the landlord dealt with the property acquired by him in the same way as a dealer in such property
        • We need to compare the landlord’s conduct with what a dealer’s conduct would be for the rent-to-own deals.  The following factors are usually considered to determine whether the landlord’s conduct consistent with a dealer’s conduct –
          • If there is evidence of efforts, such as advertising, that were made to find or attract purchasers or that a sale took place within a short period of time, it is more likely CRA considers the landlord as a dealer.
          • The more renovations or extra steps that the landlord does to increase the marketability of the rent-to-own property, the more likely CRA considers him as a dealer.
          • If the landlord is a real estate agent or mortgage agent that has a commercial background in a similar business, the more likely CRA considers him as a dealer.
      • ii.     Whether the nature and quantity of the property excludes the possibility of generating income from the property other than selling it.
        • In a rent-to-own transaction, the nature of the property allows the landlord to rent it out to the tenants and hence supports the transaction as being capital in nature.
      • iii.     Whether the landlord’s intention is consistent with other evidence pointing to a trading motivation
        • The landlord’s intention to sell the property at a profit alone cannot be used by itself to determine whether he was involved in the adventure or concern in the nature of trade.  If one of the other above factors clearly shows that the landlord is engaged in the adventure or concern in the nature of trade, his intention can be viewed as corroborative evidence.
        • The investor’s intention can change over the period of time and can have more than one intention.  If the investor’s intention is to hold the rent-to-own investment as an investment (capital in nature), CRA also looks at the secondary intention if the investor is unable to fulfill the first intention.

Admittedly the criteria used by CRA to determine whether your rent-to-own investment is business or capital isn’t black and white.  As investors, you should definitely consult your professional advisor about your personal situation to make a reasonable and supported conclusion.

If you conclude that your rent-to-own investment is considered as a business, you are required to report the downpayment, the rent and rent credit, and the ultimate sale of the building as income the year the proceeds are received for each of these components.

In the next post “Rent to Own Taxation (Part 2)“, I will discuss the tax implication when rent-to-own investment is considered as capital in nature.

The above is a guest post by Cherry Chan, Chartered Professional Accountant. Cherry specializes in real estate taxation and has many great posts on the subject on her blog. For more info or to contact Cherry, visit her website at: http://cccpa.ca/

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October 9th Event: The Secrets of Win-Win Rent to Own Investing

Andrew C. MacDonald will be speaking for Michelle Read‘s investor workshop on October 9th, 2014 at 7pm. We’d like to invite you to see Andrew’s presentation and learn more about Rent to Own investing.

Presentation Overview

In this presentation Andrew will be covering the following:

  • What rent to own is
  • The 3 major types of rent to own
  • The benefits and drawbacks of rent to own investing
  • How you can safely earn double digit returns while helping Canadian families
  • Keys to structuring “WIN-WIN” deals
  • Real life rent to own examples

On top of Andrew’s presentation, there will be an interactive Q&A period and the opportunity to network with other likeminded investors.

How to RSVP

To learn more about this workshop being held on the evening of Thursday, October 9th, 2014 at a downtown Toronto location, please contact Michelle Read at (416) 879-7323 or by e-mail: mx.mr@sympatico.ca

We hope to see you there!

3rd Birthday Lessons

Ownership Solutions celebrates our 3rd “birthday” this month.

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Here are 3 lessons we’ve learned over the past 3 years:

  1. 1. With this type of real estate, it’s not about location, location, location – it’s about PEOPLE, PEOPLE, PEOPLE.
  2. There are many worthy families out there who deserve a 2nd chance at home ownership, even where the bank has said “NO”. Our track record of success with clients is proof of this fact.
  3. Rent to Own needs to be just that – Rent to OWN. There are too many Rent to FAIL companies out there who are kicking people when they are down financially instead of truly providing them with the help they need through well designed lease purchase programs.

Thank you to everyone who has helped make the past 3 years a success. We look forward to helping many more families with home ownership going forward!

 

Case Study – Dental Collection Dilemma

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The client for our first case study was referred to us by a mortgage professional with a tight timeline. The client had good verifiable income as a mobile crane operator, a 5% down payment, but an unknown credit blemish that jeopardized his deal (and savings).

In this case, the Realtor unfortunately had the client remove the financing condition without a commitment in place, and the client later found himself unable to obtain an approval for financing. With a firm Agreement of Purchase & Sale, thousands of dollars tied up as a deposit, and just under 2 weeks until closing, this client needed an alternative since a mortgage wasn’t an option.

The Problem:
Why Couldn’t The Client Qualify for a Mortgage?

Unbeknownst to the client, he had a collection showing on his credit bureau which he thought was in great shape. It turns out when he had last moved, a dental bill for about $300 had gone to the old address, and ultimately made it’s way to collections. When he found out about the bill he went to pay it immediately, but the dentist wouldn’t accept payment because it had been referred to collections, and the collection agency had since gone out of business. The client had strong credit otherwise but this one collection was driving the client’s credit score down to 586, and with no way to get this collection off his credit bureau in time to qualify for a mortgage, the client was stuck. The client only had 5% down at the time, so a “B” lender or private lender wasn’t an option.

The Solution:
The Homeowner Prep Program Saved the Deal

gord-case-study-summaryIn this case we setup this client in our Homeowner Prep Program, made sure he was able to buy the home he had negotiated a great deal on, made sure his $5,000 deposit was not lost when he was unable to close, and gave him a 2nd chance when the mortgage lenders and insurers had said “NO”.

Our Homeowner Prep Program was able to provide 95% LTV financing when no other lenders were willing to do the deal. This gave the client the opportunity to purchase the home he wanted today while having the time required to get “mortgage ready”. This case study is a perfect example of how lease purchase programs (or rent to own programs) can be win-win scenarios when structured with the client’s ultimate success in mind.

The Outcome:
How Everyone Won

In each and every deal, we want to make sure all parties “win” in the transaction.

  • The client won since he was still able to purchase the home of his choice and our program prevented him from losing his $5,000 deposit when he was unable to close on the purchase. The program provided the client with guidance and enough time to get “mortgage ready”. In addition, the client built an even stronger down payment of 11.5% through the program to ensure qualifying for a mortgage at the end of the term was no problem.
  • The mortgage professional was able to earn 100bps on an otherwise dead lead and ended up with a satisfied client who continued to work with him through his credit repair, and to qualify for a mortgage at the end of the Homeowner Prep Program term.
  • The Realtor was able to close on a deal instead of dealing with the nasty consequences of a failed purchase transaction.
  • The seller was able to close the sale of their home in a timely manner which was important as they had retired and were moving to Florida.
  • The funding partner was able to purchase a turn-key income property with excellent cash flow, a responsible tenant with a vested interest in taking care of the property, and a pre-determined exit strategy in 3 years time.

Compare this to the mess the client would have faced if he were unable to close on his purchase and it is easy to see how the transaction became a win-win for all parties involved.

Most Mortgage Agents are Blind to the GAP in their Product Lineup

As a mortgage professional, are you even aware that there is a huge GAP in your lending product lineup? Did you know that this “black hole” is that is costing you deals, satisfied clients, and thousands of dollars every year?

If you care to know more about this gap, read on. We’ll show you exactly where this GAP exists, and how you can be one of the few mortgage pros to tap into this underserved niche in the mortgage market.

Identifying the GAP

Before we discuss why the gap matters, or how to fill the void, we need to clearly identify the gap we’re talking about. The yellow box below is the GAP, and Ownership Solutions fills it for you:

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Here is how most agents place their clients with lenders:

  • For clients with good credit and 20% down, any mortgage agent can get a conventional mortgage.
  • For clients with good credit and 5% to 20% down, any mortgage agent can get high-ratio financing thanks to CMHC, Genworth, or Canada Guaranty.
  • For clients with poor credit or who have other financing challenges but at least 15% down, any agent can take them to a “B” lender to get the deal done.
  • For clients with poor credit who have less than 15% down, there is a GAP!

The gap is this: 
Clients with 5-15% down payment who don’t qualify for high-ratio financing through CMHC, Genworth, or Canada Guaranty. 

What the Gap Means

Ok, so now we have clearly identified the gap. Next, why does it matter? What does it mean?

First, this matters because the gap is big. Most of your declines will fall into this gap.

Second, what this means is you’re missing out on a huge opportunity.  Just imagine if you could fund even half of your declines…

  • How many more satisfied clients would you have?
  • What would that do for your income?
  • How many more referrals do you think you would get?
  • Considering many of these declines are first-time buyers, how many life-long clients might you gain?
  • What would being able to fund more deals do for your referral relationships with other professionals (eg. Realtors)?
  • How much more time could you spend doing deals instead of prospecting?

If you take a moment to answer even a few of these questions, you’ll quickly realize why the gap matters and what it means. Naturally, the next step is to plug the gap or “fill the void”.

Filling the Void

With no extra work on your part, how would you like to start funding declined applicants that are currently falling into this “black hole”?

Ownership Solutions offers our Homeowner Prep Program specifically to address this gap in your lending product lineup.

Here are 2 links to help you get started today:

  1. About Our Lease Purchase Program
  2. Instructions for Submitting a Client File

Your Competitive Advantage as a Mortgage Professional

competitive-advantageFirst things first, let’s ditch the notion of competing on rate. That is NOT a competitive advantage for you as a mortgage professional.

Why not? Well for starters, the banks offer great rates for “A” clientele. Next, there are are plenty of websites out there that let consumers do their own rate shopping. There is a trend of commoditization in the mortgage industry, and if all you’re doing is offering “the best rate”, you’re doomed. Besides, do you really want to be involved in a race to the bottom? Do you want to be constantly buying down rates for your clients and making peanuts on each deal, or do you want to get paid what you’re worth?

Lowest Rate & Access to Lots of Lenders Are NOT Unique

Your competitive advantage as a mortgage professional is NOT the “lowest rate” and “access to 40+ lenders”. There are over 15,000 licensed mortgage agents and brokers in Ontario and to differentiate yourself, you have to do better than that.

Advertising that you have the “lowest rate” and access to X number of lenders is like a Realtor advertising they have “MLS access” – so does every other Realtor, plus consumers can browse MLS listings online.

Service & Customized Advice Are What Matter 

Your competitive advantage as a mortgage professional IS what you’re able to do for clients that banks and other agents cannot.

  • It’s the customized mortgage and financial advice you’re able to provide based on your extensive knowledge and real life experience.
  • It is knowing (and communicating) the important terms apart from rate which make different products a good or bad fit for a client’s situation.
  • It is understanding and providing unique products in the right circumstances to help your clients get what they want.

Make Sure You CAN Give Clients What They Want

When clients call, email, or fill out your online application, they typically want one thing – financing for their home. As a mortgage agent you need to make sure you can offer top notch advice, the right product to suit each client’s individual needs, and make sure clients end up with financing which is why they contacted you in the first place.

Why Lease Purchase Programs Matter

When clients can’t qualify with an “A” lender, you look to the “B” lenders. If that fails you may need to consider private funds. However, when clients don’t have at least 15% down there isn’t much out there for them.

Fortunately, there are alternatives such as a well structured lease purchase program or rent to own program. Our Homeowner Prep Program is a lease purchase program that allows clients to get into a home of their choice from the MLS and helps you build your business. You’ll earn a finder’s fee, have a satisfied client who will hopefully provide referrals, and you’ll have a client needed a mortgage in 2-4 years time. When you help clients that other agents can’t, you are more likely to earn a client for life.

Make sure you have a solution for every client. Click here to learn more about how you can use our Homeowner Prep Program as part of your competitive advantage!

June 23rd Event: Private Mortgage Lending 101

kwc-real-estate-investorsAndrew C. MacDonald, will be speaking for the KWC Real Estate Investors Group on June 23rd, 2014 at 7pm. We’d like to invite you to see Andrew’s presentation and learn more about Private Mortgage lending.

Presentation Overview

In this 30 minute presentation Andrew will be covering the following:

  • Overview & Private Private Mortgage Basics 
  • Private Mortgage Fundamentals  
  • Private Mortgage Due Diligence & Structuring 
  • RRSP & Registered Account Basics 
  • The Complete Process 
  • Avoiding Pitfalls, Other Options & Comparison to Traditional RRSP Investments 
  • Bonus Resources

On top of Andrew’s presentation, there will be a 15 minute interactive Q&A, another keynote speaker with experience in the same field. Finally, the evening will finish up with some time to network with other investors.

How to RSVP

You can see more details about the meeting and RSVP online at MeetUp.com.

We hope to see you there!

How Everyone Wins in a Rent to Own Transaction

how-everyone-winsA well structured Rent to Own transaction is truly win-win for all parties involved. In this article we will explore how everyone wins when these programs are put together properly.

If you are not yet familiar with how lease purchase programs work, visit the following page: How Rent to Own Works.

As a quick warning, there are many shady investors out there who are happy to setup “Rent to Fail” deals where things don’t work out as planned. As such it is important to do your research before getting involved with a Rent to Own program. Make sure you are dealing with a reputable company who has a good track record of success, and remember that you get what you pay for so the lowest down payment and monthly payment may not actually set you up well to successfully purchase your home.

Check out the full article at http://talkingrealestate.tips/everyone-wins-rent-transaction/ to learn:

  • How the Buyer Wins
  • How the Investor Wins
  • How the Realtor Wins
  • How the Mortgage Professional Wins

In order to keep rent to own programs win-win for all parties involved, it is absolutely critical that the buyer is property qualified in advance. Being able to qualify for a mortgage at the end of the rent to own program and successfully complete the purchase of the home is the only way to ensure a happy ending for all parties involved.

Steer clear of “rent to fail” companies, and remember that as with many things in life, buyers get what they pay for so the lowest down payment and monthly payment may not always be the best option. Instead, be sure to work with a reputable rent to own company who can make sure the buyer will be “mortgage ready” by the end of their term and that everyone wins at the end of the day.