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Death, Taxes, and Interest Payments: Part 1

“Nothing in this world is certain except death and taxes.”

Benjamin Franklin said this in 1789, and it’s just as true now as it was then. There’s just one thing I’d add given that the world has changed quite a bit since the 18th century: interest payments. Maybe not as certain, but just as stressful. If I could revise the quote now, I’d make it: 

“Paying interest and taxes will be the death of us.”

Make More of Your Own Money

A shocking amount of people’s gross income goes towards paying debt. Based on my research and experience, I’d say about 25%. Paying interest on your credit cards, loans, lines of credit or mortgages is something most of us will experience at some point in our lives – but 25% is still a good chunk of income that isn’t saved, invested, or used for living your life.

An even more shocking amount of gross income goes towards taxes. Tax Freedom Day was last week on June 15, meaning any income earned up to this point of the year will be paid out to the government. Anything earned after that point is paid to yourself. It’s hard to know the exact amount you pay to the government in a given year, but given this annual marker, let’s say about 42%.

To sum it up: 25% of your gross income goes towards debt and 42% goes towards taxes. That is a whopping 67% of the hard earned money you make – gone. That’s right, 67%! Unfortunately, you can’t get rid of these two things. But you can try to minimize how much of your money they gobble up. In this two part blog series, I’ll show you a few ways to do that. Tip #1: own a rental property.

Why Own a Rental Property?

Real estate is a great place to put your money without overspending on taxes or paying too much interest. Having a property that you rent out can be a huge wealth builder over time. Here are just some of the reasons why:

  • Buying a rental property makes you eligible for different deductions.
  • You can write off expenses associated with the purchase like legal fees and maintenance.
  • Interest payments and ongoing maintenance can be deducted from rental income. That means reduced income or income loss can be written off against your personal income.
  • The property will appreciate in value tax-free: you only pay taxes when you sell for a profit, which is likely if you hold onto the property for 7 years.
  • When you do sell, you’ll have to pay capital gains tax on the net profit (purchase price less expenses such as real estate fees, lawyer fees, moving costs, etc.) At the highest marginal tax rate, you would have to pay around 21.50% of your net sale profit towards tax. 

The best part of this strategy is that once you make the down payment and source tenants, it’s highly unlikely you’ll have to pay out of pocket for anything else. Your monthly mortgage payments will be paid off by the rent you collect. Before you know it, 20-25 years down the road, you’ll own mortgage-free property that you can sell for a profit or continue collecting rent on.

Moving Forward

A rental property is an amazing way to minimize interest payments and taxes; but it’s not the only way. Stay tuned for part 2 for more tips on how to make your money work a little bit harder. 

Your best interest is my only interest. I reply to all questions and I welcome your comments. Like this article? Share with a friend.

Steve Garganis: 416-224-0114; steve@canadamortgagenews.ca

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