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Your Personal Residence is An Expense

Updated: Feb 4, 2023


Front of sea-foam-green house

As someone who works in the real estate arena with income properties I have often heard the myth that your personal residence is an investment. This is a total fabrication. Here’s why.


You Pay More Than The Value Of Your House


Interest on your house is not tax deductible. For every $100,000 of mortgage, you will end up paying $175,377.01. This is calculated using a 5% mortgage interest with a 25 year amortization with a 20% down (no CMHC fees).


Property Taxes


Property taxes are partly tax deductible, but you’ll still pay out more that you’re allowed to claim. Let’s assume a very low amount of $1000 per year, that will add an extra $25,000 over the 25 years. Now our “investment” of $100,000 has cost us $200,377.01.


Maintenance


You’ll have to pay upkeep and upgrade on the property. None of these expenses are tax deductible. Lets assume a modest $50,000 spent over 25 years. ($2,000 per year) Now we’re up to $250,377.01 in pure expense for our $100,000 property.


Inflation


It’s not all bad news, inflation will affect the value of the property over time. For instance if you bought the $100,000 house in 1984 it would be worth $203,828.52 today. You’re still down $46,548,49.


Personal Residence is an Expense


Basically the house you buy and live in is an expense pure and simple. So if someone advises you to “stretch yourself” and buy a bigger house so you have a bigger “investment” get them to explain how it can be anything other than an expense.


What Does This Mean?


Well the smart individual will seek to minimize expenses as much as possible. If you can recognize that your personal residence is going to cost you money over time then you’ll treat your purchases in an entirely different way. Buying housing for yourself becomes similar to buying a car, you need one but it will never do anything except cost you money. Buying the least car you need is a wise move. Basically if all you need is a 3 bedroom house, you might want to pick a modest bungalow in an inexpensive part of town, instead of a large expensive house in a great neighbourhood. It’s that simple. Then invest the difference in actual real life investments that produce an actual return.


Compare to an Actual Investment Property


If you compare your personal residence to an actual investment property the difference is quite apparent and the conclusion cannot be anything other than that your personal residence is NOT AN INVESTMENT.


Interest, Property Tax & Maintenance


For an investment property interest, property tax and maintenance are tax deductible. For the same property, you will pay exactly $100,000 the rest of the outlay is expensed. This is before you even consider rental income. Once you consider inflation, you end up with a property worth $203,828.52. Plus you have not even collected any rent or considered rental income in the equation.


Income properties are taxed differently upon sale then personal residences but even considering the capital gains tax exemption with the personal residence you ended up losing $ 46,548.49 over time and the income property is worth $203,828.52 less $100,000 purchase price for a gain of $103,828.52.


$ -46,548.49 vs $103,828.53


That’s the difference between a personal residence and an actual investment property. Did I mention that we haven’t yet even accounted for rental income for this property? Quite frankly, I still think that people should buy houses rather than rent, but that they should reduce their housing expenses as much as possible rather then “stretch their budget” to get a better “investment”. It’s just not an investment.


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