Toronto Income Property Newsletter – November 2017

The Toronto real estate market continues to settle into this more balanced phase where buyers have more of a chance of obtaining a property than they may have six months ago. Quality renovated properties in the city core, whether income-generating or not, still are attracting a lot of bidders. As you move away from downtown and into the burbs, the demand lessens.

Earlier this year, many properties in the 905 experienced a spike, a spillover from the downtown craziness. It seems like nothing was immune from the bloated demand, but (fortunately) this has calmed down somewhat.

As the broker for a company that specializes in income properties, we need the market to offer our clients some sort of perceptible return. If a property does not offer some sort of bottom line than it can hardly be called an investment. Buyers who are hoping to cash in on future capital appreciation may have to wait a bit as I don’t think we will see prices like early 2017 for awhile again.

Best of luck to TFC in their campaign to bring Toronto its first MLS title and a championship that we haven’t seen in this city for a long time.

- P.A.

Will New Mortgage Rules Cause the Market to Drop Further?

This past month, Canada's banking regulator published the final version of its new mortgage rules, which include a requirement to "stress test" borrowers with uninsured loans to ensure they could withstand higher interest rates. These new rules took effect on October 17th of this past month.

By law, borrowers with a down payment of under 20 per cent for a home have had to purchase mortgage insurance (CMHC). Borrowers pay an insurance premium, but the beneficiary is actually the lender, because the insurance protects the loan giver in the event the borrower defaults on the loan. Anyone who puts down more than 20 per cent of the value of a home doesn't have to pay such insurance, and is known as an "uninsured" borrower — these are the buyers who will now be affected by these new rules.

The stress test itself consists of ensuring the borrower would be able to pay the loan if interest rates become higher than they are today. It is designed to simulate a borrower's financial situation by assuming they would have to pay back the loan at the posted average. Under the new rules, borrowers would be stress tested at either the five-year average posted rate, or two per cent higher than their actual mortgage rate — whichever one is higher.

Industry analysts suggest that these new rules can further stifle a market which is currently in a downward mode. It will be interesting to see how the overall market will react to these rules.

Tax Implications for Changing Your House Into a Rental Property

According to Canada Revenue Agency capital gains exemption rules, you can be considered to have sold all or part of your property even though you did not actually sell it. The following are some sample situations:

  • You change all or part of your principal residence to a rental or business operation.
  • You change your rental or business operation to a principal residence.

Every time you change the use of a property, you are considered to have sold the property at its fair market value and to have immediately reacquired the property for the same amount. You have to report the resulting capital gain or loss (in certain situations) in the year the change of use occurs.
If the property was your principal residence for any year you owned it before you changed its use, you do not have to pay tax on any gain that relates to those years. You only have to report the gain that relates to the years your home was not your principal residence.
I always recommend speaking to an accounting professional so that you are clear on the rules and any tax implications that a change of use may have.

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