If you are a Canadian looking to purchase a home, you might already know that home ownership costs are not as affordable as they used to be. The housing price bubble keeps increasing each year. However, not many people know that the Canada Revenue Agency (CRA) is offering a $5,000 tax credit to first-time home buyers.
Also called the “Home Buyers’ Amount,” this tax credit can save you a significant amount when the next tax season arrives. The CRA offers several little-known tax breaks, and the Home Buyers’ Amount is one of the least discussed write-offs available.
I will discuss the Home Buyers’ Credit, how much you can save, and a real estate investment that you can consider.
$5,000 tax credit
The Home Buyers’ Amount is $5,000 against the expense of purchasing a home. With the housing market on fire these days, almost any Canadian home you buy today could qualify you for the maximum amount.
The standard rate is 15%. It means that claiming the full $5,000 Home Buyers’ Amount could allow you to save $750 in the tax season. A $750 might not make a significant dent in home ownership costs, but it is a decent amount that you can save on your taxes.
The Home Buyers’ Amount is not a tax credit that can trigger a payout from the CRA. It means that if your total tax bill is lower than $750, you will get a lower tax write-off. Suppose your tax bill for the 2020 income year is $650. In that case, the Home Buyers’ Amount will save you a maximum of $650.
Why buying a home as an investment is problematic
The Home Buyers’ Amount is a decent tax credit for people buying a home that they want to live in. However, the overall effect is minor. If you plan to purchase a home, considering it as an investment, $750 is no more than a speck of sand on the beach for the price of an average Canadian house in today’s market.
If you are ready to pay that amount, this tax credit can be helpful. However, it will not make an unaffordable asset more affordable.
A better alternative
If you are looking to get in on the real estate market to capitalize on its returns, buying a home in this market might not be the best idea. There is a risk of a major correction that could significantly devalue your investment. Canadian Real Estate Investment Trusts (REITs) can offer you a better alternative to invest in real estate than buying a home.
NorthWest Healthcare Properties REIT (TSX:NWH.UN) can be an excellent asset to consider for this purpose. NWH is a far more liquid investment than buying a home. You can purchase shares of the company on the TSX to own a part of the company and receive returns through its monthly distributions. You can invest as much or as little as you can afford to without tying up significant funds to wait for long-term profits that may or may not come.
Investing in NWH also shields you from the effects of a housing market crash. The company owns a portfolio of properties in Canada and Europe that are primarily rented by healthcare providers. Healthcare is publicly funded in both regions, virtually guaranteeing strong cash flows for the REIT that it can use to expand its portfolio and distribute to its shareholders.
Foolish takeaway
If you’re ready to buy a home, the Home Buyers’ Amount can be an excellent way for you to save some money on your taxes. However, investing in a portfolio of income-generating assets like NWH could be a better way to go if you are considering getting into the real estate sector as an investor.
