Own To Rent – Rent to Own

Buying a Motorhome is a dream of many people who are about to retire. If you are in that happy company, then you can buy your Motorhome sooner than you think, AND, have it pay for itself along the way. This can be true for many people, but is especially true for soon to be retirees. Why is that?

First, you have to treat it like the business it is, and run it like a business. The CRA will allow you to have loses for several years in the beginning as long as there is a reasonable business plan in effect, and a “reasonable expectation of profit” in the longer term. That does not mean a guaranteed profit or even a profit in a year or two, but over the course of a few years, a reasonable plan should expect to show a profit, and you’ll pay tax on that profit at that time.

The first reality is that in North America , the rental season is primarily in the summer months. If your plan is to use your RV every summer, and then make it available for rent the rest of the year, that is not a reasonable plan, and therefore it’s not a business. Younger families with kids who vacation in the van on school holidays would have a hard time pretending otherwise.

Seniors and early retirees have different needs. They need to be home for four to six months in each year to qualify for provincial health insurance. ( 5 months in Ontario ). It makes sense to stay in their home province in the nice weather, maximize the rental income of the RV, and scoot south in the fall.

If you buy the vehicle with the immediate intention of using it in a rental business, you pay no provincial sales tax. (This may change somewhat when the HST is in force). Not only do you save the amount of the sales tax, but you’ll have a smaller loan at lower interest costs as well. You will pay the GST up front; recover all the GST from the renter’s GST paid in until you get it all back. From then on, the government gets it, but in the meantime, that tax credit helps pay down the loan.

New and nearly new motor homes qualify for 20 year amortization plans. This makes for an affordable monthly payment. The interest each year is fully deductible against the income earned. As an added bonus, most bank loans come with insurance to cover the debt, with no medical required. This is a good way to get extra insurance for those with health problems.

Tax advantages.

You will report all the income you receive from renting out your unit. That’s the gross profit. Then you get to deduct stuff.

The interest on the bank loan is deductable. Early on, this is a big portion of your payment. You deduct a capital cost allowance ( see addendum) that is pretty hefty in the early years. You get to deduct major repairs. Again note, upgrades like air ride suspensions, heavy duty inverters, solar panels etc, new TVs etc are not repairs, they get added to the original cost of the unit and then expensed at 30% of cost each year. They may also be sales tax exempt.  Minor maintenance, like oil changes etc are deductible when they are done as part of the rental program, but not when done as part of your personal use.

Costs of driving to the RV yard are deductible when you are going there to check on the unit or take care of any rental problem. Truck washes are deductible, in rental season. Any cost spent to earn income or maintain the vehicle so that it can ear income is deductible.

The CCA and interest costs are heaviest at the beginning of your business. You will have a positive cash flow but, your taxable income will be negative in those early years. The accounting loss can be deducted from your normal income, and it’s deducted right off the top, so it reduces your tax at your highest tax rate.  When, in the future, you sell the unit, you will generally take a loss from its original cost. This is the real, measurable depreciation. If you have deducted more CCA than real depreciation, the difference is added back into your income in that year. This is called a recapture of CCA, and will be taxed in the year it was earned.

This is why it’s a good deal for retirees. You get to save tax at the higher rate when you are fully employed, and pay some tax on the recovered expense when you are retired and taxed at a lower rate. It’s the same principle as an RRSP.  It can also be a useful way for income splitting. The spouse with the lower income pays the non deductible household expenses, and the person with the greater income takes the income and deductions from renting.

There are risks.  Gas may go to $5 a liter and that could impact rentals. Other outside events can impact your chances of success and reduce your expected income.  You must be seen to have a viable business plan. Plans can go wrong, and they don’t have to guarantee a profit but it has to look viable. You can’t sabotage it by taking your unit out of service for personal use at peak earning times. (You may get away with this as a one time event, but not if it’s a common occurrence.)

A few words about depreciation.

Depreciation and Capital Cost Allowance are often referred to as the same thing. They are not, but they are similar. Depreciation is the reduction in value of an asset over time and use. It can be estimated at any time, but never actually calculated until the asset is sold or scrapped.

For example: Bill buys a new Class A diesel pusher. He treats it better than his mother in law, and he likes his mother in law. The unit never sees snow, never goes on long road trips and is maintained by the book. His pal Chuck buys a twin of it the same day, same cost. Chuck’s son and his pals love heavy metal. Every weekend, they are off far and wide to a concert. The coach is party central. The maintenance schedule is a distant memory. When Bill and Chuck sell their units at the same time, there will be a big variance in the price each receives. Chuck will suffer from a greater depreciation and a great loss on the sale. Keeping his son happy may have been worth it or not!

Capital Cost Allowance is a tax accounting term. It only matters if the asset has been used to earn income, and the income is being reported on a tax return. It involves only time, and is independent of use or wear and tear.

When an asset is purchased to be used to earn income, the initial cost of the asset is called the Capital Cost (also known as Book value). The tax authority realizes that the value of that asset will diminish as it is used, and this loss is part of the cost of doing business. They certainly don’t want to send a mechanic over every year to re-appraise the unit. Instead, they use a mathematical formula based on the average useful life of that class of assets. It’s called a Capital Cost Allowance. There are several classes, each with its own rate. Each year, the CCA is calculated and added to the expenses incurred to earn income in that year. The value of the asset is adjusted by the amount of this expense each year. This is the Adjusted Cost.

Motor homes fall into Class 10. In this class, the formula allows the owner to allocate 15% of the capital cost of the unit as an allowance for the decline in value for the first year of ownership. The amount calculated is charged as an expense against the income, and is deducted from the value of the capital cost. In the following years, they allow 30% per year, calculated on the new capital cost as adjusted for each year’s allowance.

Here is an example. CCA for year 1 is 15% of Book Value. All others 30%

When the unit is sold or otherwise disposed of, there is an actual sale price. (If scrapped it may be zero) The actual sale price is deducted from the Adjusted Cost. If the sale price is less than the adjusted cost, the extra amount is an expense and is deductible from income. If the sale price is more, the difference is profit and is added to income.

This is only a guide. Each individual circumstance may differ and one should take your own circumstances into consideration before going down this road.