UST/Luna - Worthless now!

Dang that timer! Should say "less than 80% of the value of the home." And - I'm told it's even possible to get a FIFTY year mortgage here - if you have enough equity to do the deal without CMHC insurance involvement.

Francis Bacon said "knowledge is power." Johann says "money is power."

 

Land acquisition costs now constitute an average of 40% of housing prices in the US. Over double what it historically has been. Imagine that Canada is in a similar position. Unfortunately it effectively crippled the profitability of developing affordable housing.

 

If you structured a mortgage like Johann describes here in the U.S. it would almost certainly be treated as an interest bearing loan by the IRS. The parties cannot avoid that treatment merely be declaring that the buyer gets a certain amount of "equity". The IRS will impute market rate interest as part of the overall purchase price then impute what portion of each payment made is principal and what portion is interest.

This matters a lot to the IRS because that imputed interest is taxable income to the seller or financer. It is also deductible against ordinary income by the purchaser. The effect of the arrangement would be to shift taxable income from the lender to the buyer and that's usually a no no.

I would be surprised to learn that the Canadian authorities would see it differently but who knows. It's Canada after all.

As always, this isn't tax or legal advice so don't rely upon my opinion when making your own financial decisions.

 

Yeah, they do. Mortgage interest isn't deductible on personal taxes, here. Oops - I forgot to tell Steve that. Anyway, I know for sure that it's being done by institutions, so I'm sure they've got their end covered. They always have.

 

And Nosborne - they're doing this in the US - in a big way - so there must be some standard Government-approved way of doing these things.

One site among many: https://www.guidanceresidential.com/resources/faith-based-financing/10-common-guidance-residential-islamic-home-financing-questions/

 

@nosborne48 I spoke hastily. Apparently there are still ongoing issues with the equivalent to "mortgage interest deduction" on these mortgages, in the US. Good info from a US lawyer here: https://www.angloinfo.com/blogs/global/us-tax/6853-2/

Also some campaigning that "it's time" for a (promised?) change in treatment of this. https://thehill.com/opinion/finance/466461-sharia-law-is-already-here-the-irs-must-respond/

 

Is the "rent" taxable income? Can the finance company foreclose on the buyer's interest if the buyer defaults? Can the finance company require the buyer to bear all of the costs of maintenance and repair over the entire property? Does the finance company take depreciation against its interest in the "rental" property? Who pays what part of real estate taxes? Does the buyer have the right to exclude all others' presence?

There are a thousand and one questions in this type of transaction and whether the IRS will see it as I do at first glance, imputed interest on a loan, will depend on the answers to these and many more.

 

From previous posts:

 

Two things, by the way. I'm not impressed that at least some buyers wish on the one hand to deny that they're paying interest yet want to claim a mortgage interest deduction. Okay then. Right.

The second thing is that I absolutely think they ARE entitled to take that deduction! It is immaterial to me what they call it among themselves.

Oh, a third thing...the rather good article Johann linked called some forms of prohibited interest "riba". The Gemara Aramaic term is "ribit" which loosely translates as "bite".

 

Yes - I think you and I had a discussion quite a few years ago on DD. I used what I thought was a Hebrew word. I'd read it as "ribis" and you said it should be "ribit." And after the frog-chorus died down, I mentioned the Islamic concept of interest as "riba" and thought (as I still do) that there might be a linguistic connection. Just now - I read something...

According to Rabbi Wiki (thanks) - heeere's RIBA!

Riba is an Arabic word that means “to increase" or “to exceed" and is commonly used in reference to unequal exchanges or charges and fees for borrowing. Interest is deemed riba, or an unjust, exploitative gain, and such practice is forbidden under Islamic law.

 

I guess there IS a connection. Maven Google and Rabbi Wiki work well together!

Just asked Google if Riba and Ribit were related. Yep! Got this link:
"INTEREST, RIBIT, AND RIBA: MUST THESE DISPARATE CONCEPTS BE INTEGRATED OR IS A MORE NUANCED APPROACH APPROPRIATE FOR THE GLOBAL FINANCIAL COMMUNITY? — PART I"

Internet is SO good, sometimes! But then so are we, Nosborne!

 

My only concern is that the lender must pay income tax on the imputed interest. Or rent received if they call it that.

 

There's no doubt in my mind that Canadian institutions offering halal mortgages are doing so "by the book" and complying fully with all Government tax requirements. Here's a recent story - the company was set up by a Canadian lawyer - a non-Muslim.
https://www.theglobeandmail.com/business/article-muslim-homebuyers-flock-to-halal-financing-options-as-new-companies/

 

"Snap!"