Property Tax Deferral: ‘Home A Loan’
by Arnold Machel, CFP®
“Then my people will live in a peaceful habitation, and in secure dwellings…”
Isaiah 32:18 (NASB)
Every year around this time, I get asked by someone if deferring their property tax is a good idea.
First off let’s look at the rules. The BC Regular Tax Deferment Program allows persons with disabilities, persons turning 55 or older during the current year or surviving spouses to take advantage of the deferral. There is also a separate program to defer property taxes for families with children, so if things are tight you may want to check it out, but for the purposes of this article I’ll be discussing the regular program only.
The province effectively lends you whatever is required to pay your property tax and then charges you simple interest of no greater than prime minus two per cent per annum, making the current rate 0.7 per cent. That term, ‘simple’, is important. Simple interest means that you are not charged interest on the interest, so not only do you get a low rate, but also it does not compound. That’s not such a big deal at this specific point in time while interest rates are low, but should they creep up, the lack of compounding is potentially a huge benefit.
You can defer your property taxes in this way each and every year until a) you sell the home or b) both of you have passed away, but you must maintain a minimum equity of at least 25 per cent of the assessed value of the home at all times.
Financially, that’s a great deal on a loan, but what you need to wrap your head around and be willing to accept is that it’s just that: a loan. It is a loan using your home as collateral and should you ever want to borrow more money by way of a mortgage, you will need to pay off that loan first.
So, on the one hand it’s a loan (not free money), but on the other hand it is the cheapest loan you will ever get. Does it make sense to take advantage of it? As in most cases, that depends on individual circumstances… but it does seem intriguing and it is well worth exploring.
Generally speaking, I suggest that people should continue to pay the tax until such time as money becomes tight for them and then they should seriously consider taking advantage of the deferral. But in doing so they must be aware that should they ever decide to move homes the government will want them to pay the tax back before anything else. And when they pass on, the amount of the loan will come out of their children’s inheritances. If they are OK with both of those scenarios and if they have good use of that tax money, then absolutely, they should consider applying to have their property tax deferred.
Applying is simple and easy. Do a search for BC Property Tax Deferral and the BC government website will walk you through the details, including how to apply.
Some people like the idea of taking advantage of the deferral and then investing the money that they save and certainly that can be advantageous if they expect to earn more than the interest they are being charged. In fact, at the current time, you can get GICs paying a higher rate than 0.7 per cent. Do that utilizing a TFSA and now you’re cooking with gas. You can be guaranteed to earn more and (if you have the room) you can earn it tax free, too.
Human nature is the enemy here. All too often well-meaning people defer their property tax, planning to deposit or invest it and just don’t get around to the second part. A bill comes up and they use the extra cash in hand from the deferral to pay the bill. Then they still owe money, but haven’t set aside what they planned to, meaning that there is less equity available in the house for funding a retirement home or any other purpose. Not a problem if done intentionally, but it can be a problem if it erodes one’s backup plan without meaning to.
Ultimately, in my opinion, deferring property tax in most cases is a great idea, especially if the proceeds are saved and/or invested rather than spent and even more so if that’s done in a tax preferred account such as a TFSA or RRSP. It’s even a good idea when money is tight and one is in later stages of life, such as retirement.
We just need to be absolutely cognizant and reconciled to the fact that in arranging for the deferral, we are setting up a loan that will increase both due to interest costs and due to future deferral years and that ultimately it will need to be paid pack, which will result in either our heirs receiving less and/or a reduction in sale proceeds when we move.
Arnold Machel, CFP(r) lives, works and worships in the White Rock/South Surrey area. He attends Gracepoint Community Church where he serves on the Leadership Team. He is a Certified Financial Planner with IPC Investment Corporation and Visionvest Financial Planning & Services. Questions and comments can be directed to him at firstname.lastname@example.org or through his website at www.visionvest.ca. Please note that all comments are of a general nature and should not be relied upon as individual advice. While every attempt is made to ensure accuracy, facts and figures are not guaranteed.