Oh hey, I suppose there’s one more thing to say today. All sorts of advertisements from people looking to get investment dollars. I’ve got a rough idea where I want to put mine. The big thing this year seems to be real-estate investments. I’ll probably be putting some money into real-estate, but I don’t think I’ll put RRSP money into there. I don’t really understand all the tax rules, but as I understand it, you get to depreciate the cost of the building. These things also tend to be mortgaged. Right now, I’m under the impression that roughly four times my original investment should simply be returned to me as depreciation. Maybe I’m abnormal having more more money to invest than my RRSP contribution limit, but there just isn’t enough talk about the tax implications of different investments.
2008 February 5 at 12:31 pm |
hmmm. i hope you don’t make any investments based on this misunderstanding you’ve posted about. depreciation is the idea that something is worth less over time. so a house that is worth 100K today deteriorates and next year is worth a bit less, let’s say 95K. so depreciation makes your investment worth less, from a value perspective. when you file your taxes, you can say that you lost 5K on your investment due to depreciation. if you lose money on an investment, then the government won’t tax you on that 5K, in this case. so depreciation can reduce your tax burden, but it sure doesn’t put new money in your pocket. depreciation is no return at all. further, when you ultimately sell a property, your gain is based not on the difference between your purchase price and selling price but instead on the difference between the adjusted value after depreciation and the selling price. so if you sell that house next year for 110K, you make not 10K to pay taxes on but instead you make 15K to pay taxes on. so it’s a shell game. depreciation lets you pay less tax now and more tax later.
anyway, real estate is a high risk investment right now because generally the value of real estate is dropping in a big way after the past several years of gains. so that house you buy now for 100K may be worth 90K next year. who cares that you got to defer some taxes through depreciation in that case?
2008 February 5 at 6:29 pm |
That’s more or less the same idea I have of depreciation. I omitted the definition because I felt it was kind of generally understood. The question I’m asking is why does it make sense to hold investments that defer taxes in an rrsp, which defers taxes? It feels kind of like sticking a mini-fridge in a fridge and leaving some stuff out to spoil on the counter.