Thanks for your explanation. I actually did my taxes on paper for a few years before I went to software, but as a student I was more concerned about just getting it done than I was in really understanding what I was doing.

Dear me, I’m not really improving my image much, am I?

In my own words, a tax deduction is a reduction in your taxable income. So if my income was G, it is now G-D, where D is a tax deduction. So the tax I owe is now (G-D)*T rather than G*T, so the amount of “credit” I get from this tax deduction is D*T. Well it’s not exactly like that, because D will come off the highest tax bracket at your “marginal tax rate” (the tax rate on every new dollar of income you earn above and beyond what you already earned). (For those who know what marginal tax rate is, the credit you get from a tax deduction is D*T’, where T’ is your marginal tax rate).

A tax credit is just the amount of the expense (like tuition let’s say, multiplied by the lowest marginal tax rate of around 15-16%).

T is > 15-16%, so tax deductions are better, especially if you are in a high tax bracket.

It helps to do your taxes on paper a few times to understand these concepts (I did it for many years before finally understanding).

For any other blog readers who might like a clarification, here’s an explanation I found when I Googled “canada tax credit versus tax deduction”: http://thegallopingbeaver.blogspot.com/2006/05/tax-deduction-vs-tax-credit.html

Hope you don’t mind me adding the link, Dave, but I know you vet comments first, anyway. Great post, btw.

It is funny how long it takes for the market to “correct” itself. When we went looking for apartment rentals in downtown Vancouver in April, we went to a new building called “Firenze” and none of the landlords were expecting a positive cash flow on their condos and admitted so. They were expecting to flip them but eventually it becomes hard to find a greater fool.

It is not in this case. Even the gross rental income is lower, so you’ll essentially get a tax break on your monthly loss of $450 plus whatever other expenses you paid.

I take a very simple approach when someone pitches a real estate investment. If I owned the thing outright, what would I get. In this case it is a gross of 4.1%. Net yield is somewhere in the 1%-2% range. You can buy a real return bond paying 2.2%. Why would anyone think this is an investment?

The other point that you may have overlooked in your example is that $3149 monthly mortgage payment has a little bit of principle repayment in it. So if you are in a high enough tax bracket and you could recover the extra $449 a month that isn’t covered by the rental income through the tax deduction you are in effect getting your tenants to buy the property for you through their rent. So you aren’t just relying on the value of the property to increase, you are relying on the mortgage being paid down by your tenants.

So because of the deductibility of the interest on the mortgage it actually can make sense to put as little down as possible (to a point that depends on your tax bracket) so your net return on your investment is higher.