Investing your RRSPs in an income property may sound tempting, but before diving in, it's crucial to weigh up the pros and cons.
First of all, it's important to note that RRSPs cannot directly hold an income property. Instead, this plan is intended for liquid assets such as cash, GICs or stocks. This means there are several options to consider before deciding to use your RRSPs to invest in real estate.
Option 1: Direct RRSP withdrawal
The first option is to withdraw funds from your RRSPs, pay the applicable taxes, and then use the money to purchase an income property. However, there are significant tax implications. RRSP withdrawals are taxed as ordinary income, which can push you into a higher tax bracket.
In general, this option should be avoided when purchasing an income property, because of the unfavorable tax consequences.
Option 2: The HBP (Home Buyers' Plan)
The HBP is designed for first-time home buyers. If you already own a home, this option is not available to you. However, if you don't yet own a home, you can withdraw up to $35,000 per spouse from your respective RRSPs to purchase an income property.
It is essential to note that you must reside in one of the units of the income property you are purchasing to be eligible for this program. The HBP offers flexibility in terms of the type of building, whether it's a duplex, triplex, quadruplex, or even buildings with five or more units.
What's more, the HBP provides a repayment schedule to replenish your RRSPs without tax penalties, while benefiting from rental income to cover a portion of expenses and potentially profit from real estate appreciation.
Option 3: Invest in a REIT (real estate investment trust)
An alternative to investing directly in an income property via your RRSPs is to invest in a REIT. This allows you to indirectly own real estate and receive distributions within your registered plan. However, unlike direct ownership, REITs don't offer you the operational control or tangible benefits of an income property.
In conclusion, while RRSPs may offer options for investing in real estate, they are generally better suited to other types of investments. An alternative might be to use the equity in your current residence as a downpayment to acquire an income property, an approach facilitated by many Quebec financial institutions. This approach involves using up to 80% of the value of your home minus the mortgage balance to invest in an income property.
