Millennials: How to Get Tax-Free Money to Buy a House

You can use the Home Buyer’s Plan to buy a home. If you can’t afford a home you can invest in REITs like Killam Apartment REIT (TSX:KMP.UN).

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If you’re a millennial and you want tax-free income to buy a house, you may be in luck. Thanks to a federal government program, you can take up to $35,000 out of your RRSP with no tax penalty. Normally, RRSPs are taxed heavily on withdrawal, but there is one exception that lets you take out money tax-free. In this article, I’ll explore that “exception” and how you can use it to buy a house.

The Home Buyer’s Plan

The Home Buyer’s Plan is a federal government program that lets you withdraw up to $35,000 tax-free from an RRSP to buy a home. After you withdraw the funds, you have to pay them back to the RRSP over 15 years. Not all RRSPs qualify for the program. For example, locked-in or “group” RRSPs may not allow you to withdraw funds at all. But as long as you have a self-directed or bank-run RRSP, you should be able to qualify for the tax-free withdrawal.

Do you qualify?

There are a few conditions you have to meet to qualify for the first time home buyer’s plan:

  • You must be a first-time buyer.
  • You must have a written agreement to buy a home.
  • You must be a Canadian resident.
  • You must intend to occupy the property–i.e. not use it as an investment.

If you meet all these criteria then you’re free to withdraw up to $35,000 tax-free from your RRSP. That could be a big step toward buying your first home. It certainly won’t single-handedly get you to your goal though. The average Canadian home now costs over $700,000, so $35,000 only gets you to a 5% down payment. Unfortunately, for millennials, the raw cost of buying homes is often too much to bear–tax-free RRSP withdrawals or no.

Can’t afford a house? Here’s an alternative way to get exposure to real estate

If you can’t afford to buy a house but still want some real estate exposure in your portfolio, you might want to consider investing in real estate investment trusts (REITs).

REITs like Killam Apartment REIT (TSX:KMP.UN) trade on the stock exchanges and can be bought for as little as $10, $15, or $20 per unit. This makes them easy to get started with compared to direct homeownership. And they can be pretty lucrative investments, too. Killam Apartment REIT is up 20% over the last 52 weeks and has a 3.3% dividend to boot.

You can get even higher yields than that with other niche REITs. NorthWest Healthcare Properties REIT (TSX:NWH.UN), for example, yields 6.3%. REITs are famous for paying out a high percentage of their earnings as dividends–they’re legally required to do so. So the income potential of these investments is very high.

With a $100,000 portfolio invested in KMP and NWH, you’d get about $4,800 in dividend income each year. That’s not a bad little income supplement and could provide some cash flow you could use to make a down payment on a home later. Buying such REITs is definitely a real estate play worth considering for those who can’t afford homes just yet.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Andrew Button has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Killam Apartment REIT. The Motley Fool recommends NORTHWEST HEALTHCARE PPTYS REIT UNITS.

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