If buying your first home is one of your goals for 2024 here is how to do it in the most tax effective way.
Marital Status
Marital status does not play a huge role on a tax return but when it comes to buying a house it is vital.
If you are a couple but still considered single and not yet common-law or married you are able to DOUBLE your tax benefits.
In the following sections I will be talking about how to strategically utilize the First Home Savings Account, RRSP Home Buyers Plan and Home Buyer's Amount tax credit to your advantage. If you are considered single and you both meet the first time home buyer qualifications you can double up on these benefits. If you are married or common-law you only get one Home Buyer's Amount tax credit.
And possibly the most compelling reason martial status matters:
If your common-law partner or spouse does not qualify as a first time home buyer neither do you- even if you have personally never purchased a home before.
First Time Home Buyer Qualifications:
You are considered a first time home buyer if you did not live in another home inside or outside Canada that you (or your spouse or common-law partner) owned in the year of acquisition or in any of the four preceding years.
If you are not BOTH first time homebuyer's and you are married or common-law the rest of the article is not relevant to you since you are not considered a first time home buyer and therefore you are not able to use these strategies.
It may be worth considering to postpone becoming common-law or legally married until after the first home purchase-especially if one partner does not qualify as a first time home buyer. If that is the case and you are already planning on buying a home together and getting married it might make greater financial sense to purchase the home prior to tying the knot.
First Home Savings Account (FHSA)
2023 saw the induction of the First Home Savings Account. This new account is my personal favorite out of the 3 tax advantage accounts available to Canadians. This is because it combines the benefits of an RRSP with a TFSA for 100% TAX FREE money. You can ready more about the account HERE.
If you have contributed money to your FHSA you are able to withdraw all or some of that money to put towards your down payment. If you have any money left in the account you can either roll it into your RRSP without affecting your RRSP contribution room or withdraw it and pay the tax on the withdrawal.
Because the tax advantages of this account are so great I personally am waiting until the 5 year period is up to maximize the tax deduction (read: tax savings) before purchasing my first home. My plan is to max my FHSA each year which is $8,000/year to a lifetime maximum of $40,000 in contributions (5 years) and then purchase a home.
I can shorten this time period by one year since there is no minimum time period that the money must be in my FHSA before I can withdraw it. That means that January 1st of my 5th year I can deposit $8,000 into this account to get the $8,000 tax deduction I want and then immediately withdraw it for my down payment.
Hot Tip: If you are buying a home this year, and you have not yet contributed the yearly maximum of $8,000 to your FHSA for this year, first open a FHSA and deposit the $8,000, THEN withdraw it for your down payment. That one small act of rerouting the money will give you an $8,000 tax deduction which translates into $2,000-2,740 *in tax savings!
*using an annual income of $35,000 on the low end and an annual income of $100,000 on the high end in the province of Alberta.
If you are married or common-law and both considered first time home buyers you are both able to contribute to your FHSA and withdraw the money in that account tax free for your down payment. If one member of the couple is not considered a first time home buyer neither of you are able to use the FHSA for your deposit. In this case it may be worth rolling over your FHSA into your RRSP.
RRSP Home Buyers Plan (HBP)
You may be aware of the Home Buyer's Plan through your RRSP. Under this plan you are able to withdraw up to $35,000 from your RRSP. You then have up to 15 years to pay it back and payments start after the second year. For example, if you withdrew $35,000 in 2020 you would begin your repayments in 2022. You may pay back your HBP early without any penalty.
The HBP is great because you are able to withdraw the money from your RRSP without having to count it towards your taxable income (as long as you make the minimum required payback each year) and when you do payback the money it does not affect your RRSP contribution room.
If you just did a straight withdrawal from your RRSP for the $35,000, not under the HBP, the $35,000 would count as taxable income on your tax return and you would not only have to pay tax on that money but it could even bump you into a higher tax bracket! In addition to the taxes you would be required to pay on the withdrawal you would also lose that contribution room, so if you re-contributed the $35,000 to your RRSP at a later date it would eat up precious new contribution room.
You can use the HBP in conjunction with the FHSA to really maximize your tax efficiency.
However, unlike the FHSA, the money must be in your account for at least 90 days before you can withdraw it under the HBP. If you have the time to wait the 90 days and the funds available it may be worth it to contribute up to $35,000 to your RRSP to get the $35,000 tax deduction and then withdraw it for your down payment. You can even choose when you want to apply that deduction to your tax return to really maximize your tax savings which you can read more about HERE.
If you are married or common-law and both considered first time home buyers you are both able to participate in the HBP and withdraw the money in that account tax free for your down payment. If one member of the couple is not considered a first time home buyer neither of you are able to use the HBP for your deposit.
Home Buyer's Amount
Lastly, the Home Buyer's Amount is a tax credit available to all first time home buyers. Originally this credit was $5,000 but it was increased to $10,000 for the 2022 tax year and all future years.
Since federal tax credits are taken at a 15% tax credit rate the $10,000 tax credit effectively saves you $1,500 in federal taxes.
The only catch is that if you are married or common-law there is only ONE credit per couple. You can choose how you would like to assign the credit. You can choose for one person to claim all of it, or do a 50/50 split, or any other percentage split.
Personally, if one person in the relationship has a higher income than the other I choose to claim it on the higher income earner since we want to load the most credits on their return to reduce their higher tax owing.
I hope you learned something & happy house hunting!
Laura
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