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Rental Property Income Taxes and Deductions





As tax season is coming up, I've had a few readers email me about how income taxes are calculated with investment rental properties.  It's actually a pretty basic calculation, with your total NET rental income added to your regular income throughout the year.  The basic formula works out like this:

Total Rental Income – Expenses = Net Rental Income

Total Rental Income is self explanatory, but what is considered an expense?   Listed below are the expenses that are tax deductible:

  • Mortgage Interest (from your annual statement)
  • Property Taxes
  • Insurance
  • Maintenance/upgrades
  • Property Management
  • Utility bills (if you include them in the rent)
  • Office supplies
  • Car (there are exceptions)
  • Internet connection, telephone, cell phone (portion used for business)

For example, my rental property brought in around $10,000 in rent last year, with expenses listed above totaling around $8000.  In my case, $2000 was added to taxable income for the year.  At the 40% tax bracket, I would pay $800 in taxes for the year. 

What if I had a loss?  No problem, this amount is subtracted from your other sources of income that are taxable for the year. So say that I had a $2000 loss instead of a gain. Providing that I paid in taxes from other income sources throughout the year, I would get back an extra $800 during tax refund season.     

What if you live in a 2 unit home and you live in one of them?  In this case, you can still deduct mortgage interest and property taxes, but only a percentage of it.  The percentage depends on how much space you have rented relative to the size of the building.

There you have it, a basic explanation of how rental property income tax is calculated.  Please note that I'm not a tax professional so take the information above as a primer for your own research.  I would recommend that you contact a tax professional before calculating your deductions.





162 Comments, Comment or Ping

  1. 1. Telly

    Good summary FT.

    We’ve never claimed car expenses for our properties as I’m not comfortable with the calculation based on the fact that we don’t keep track of the kilometers driven for rental purposes. I keep telling my husband that we should start but we haven’t done so to date.

    How do you determine how much of your personal utilities (phone, internet, etc.) is used for the purpose of your rental business? This is something we’ve never dedcuted either.

    Also, do you know offhand if it is possible to carry forward rental property losses?

    One last item…perhaps you could mention / include CCA in your expense list. Not sure if you claim CCA but it is definitely an expense that should be included.

  2. Telly,

    Good call on the CCA. I forgot about that one b/c i’ve never claimed CCA before on my primary residence (with apt) b/c it would eliminate the tax free status when it came time to sell. Does claiming CCA affect the sale of a stand alone rental property?

    Oh, and yes, you can claim rental property loss against other income. That is providing that your rental business is a personal business and not under a corp.

  3. You should cover blog expenses (ie part of your internet costs) that you can write off.

    Mike

  4. 4. Telly

    FT,
    We don’t claim CCA either. In the case of a stand alone rental, you must include the recapture when you sell so basically, you either take the money upfront or later. Are you sure that you are not required to pay capital gains on part of your property if it was rented out? That’s interesting, and makes the idea of owning a duplex for example, seem more advantageous.

    Someone (marty123) over at the CB forum put together a really nice “rule of thumb” for claiming CCA once upon a time. Generally, if you’re a high income earner, you should claim CCA but the caveat is, you MUST invest that money. If you spend it on a vacation, you would have been better off not making the claim.

    Here’s part of his post:

    “Assuming Ontario, a 7% opportunity cost (with the refund) and a 46% tax rate at the time of disposing of the property, if your current marginal rate is:

    46% -> claim CCA
    43% -> claim CCA if you’ll keep the property for at least 1 year
    35% -> claim CCA if you’ll keep it for 5 years
    31% -> claim CCA if you’ll keep it for 6 years
    21% -> claim CCA if you’ll keep it for 12 years”

    http://forums.canadianbusiness.com/thread.jspa?forumID=16&threadID=3593&messageID=214738#214738

  5. 5. Telly

    Sorry, I guess my question is a little unclear / confusing. The reason I asked about carrying forward rental loss is because of the fact that I work in the US and have no Canadian income (to write the loss off against). In this case, I’d prefer to carry forward the loss (as it would go to waste for 2007) to use in subsequent years when I can claim the loss on the profit for the rental property (year 2008).

    So, can you shed some more light on how you claim expenses on your vehicles / internet / cell phone / etc. if you in fact do that?

  6. I’ve been looking into purchasing a home (as a primary residence) but then renting it out as a vacation home in the summer on a weekly basis.

    Would this be considered, from a tax perspective, the same as living in a duplex and renting out half?

  7. Telly,

    Ah, I read your comment too quickly. I believe that you can carry forward your losses, however you’ll have to confirm with an accountant on how to do this.

    In terms of what I claim:
    Vehicles:
    I record the mileage at the beginning and end of the year. During the year, I keep a log of my “business” KM’S. Take the business KM’S as a % of your total KM’S, and that’s the amt you can claim from your total car expenses. Keeping a log is VERY important (required).
    As to what you can claim on your vehicle:
    CCA/depreciation, loan interest, gas, maintenance, insurance, license/registration.

    So for example, if you drove your car 10% for business and your total expenses were $10000, then you can claim $1000.

    Internet:
    I claim a small portion of this, around 20%. It’s more of an arbitrary number as it’s hard to prove how much you actually use for business.

    Cell/Phone: I don’t claim these. The only way I would claim a cell phone is if I had a dedicated cell phone for business.

  8. Moneymusing, that is an interesting scenario. You’ll have to check with an accountant, but i’m thinking that you may be able to claim it like a duplex with exceptions. Perhaps how it may work in this case is that you can claim the expenses as a portion of the time that you spend renting it out. So if you rent the house out 30% of the year, you can claim 30% of the total expenses. Note that i’m speculating as to how it would work, so you’ll need to get official advice from a tax pro.

  9. 9. Rod Payne

    Also, if you pay a tax professional to prepare your tax return and you have a rental property, the tax preparer’s fee is deductible in whole or in part, depending on your situation.

    Also, if you have a spouse/children in a lower tax bracket make sure they’re the ones collecting rent/shovelling snow/mowing the lawn (and getting paid at market rates, by you) for it. Very effective form of income spltting.

  10. 10. Warren

    I own a rental property, and it is furnished. For furnishings you can write them down yearly as capital purchases (similar to CCA). I believe they are in a 25%/year bracket, which can be pretty good. This will be the first year I do it so I’ll have to look into that a little closer.

    Also, double check the rules on your car expenses. I seem to remember something like “car expenses for collecting rent are not deductible” unless you own multiple rental units. Weird but there it is.

    I don’t understand the resistance to CCA. If you are anywhere near the highest tax bracket its a no brainer in my view. Of course you need to be disciplined with what you do with your tax refund.

  11. 11. Rod Payne

    Furniture is 20% (10% in the year of acquisition – half year rule).

    As for CCA on the rental property (note: distinguish between the building and the land, which is not eligible for CCA), it can make sense for some people, but my default position is to recommend against claiming CCA.

  12. Thanks for that link Varun!
    My issue seems to be covered in much the same way as if you were renting out rooms individually but retain the place as a principle residence.

    Normal deductions are allowable but CCAs is not.
    http://www.cra-arc.gc.ca/E/pub/tp/it120r6/it120r6-e.html#P200_51963

  13. 14. rick t

    New to investment market!!…If I dont claim the deuctions do I have to claim the income ?? Why ?

  14. 15. Rod Payne

    rick t:

    Under the Income Tax Act, you are required to report all of your income from all sources anywhere in the world. Oddly, even though you are required to report the income, any deductions from that income are optional.

  15. 16. sg

    i have a rental property bought under HBP as a principal residence. I never have been occupy it…. it is rented since i bought it. Right now i am renting for my self.

    HOW WILL BE THE TAXATION SYSTEM IN MY CASE —consider that i am not planning to stay there and will buy another property to stay with family.

    2) Mayb e i will go there after 3 years used as a rental property.

    Can i cancell my HBP PLAN and writing a letter to cra that i am not living there —( i will return my RRSP withdrawal immediately )

  16. 19. Tim-eh

    I saw on another board that “If you rent a room to a friend or relative at less than fair market value and this results in a rental loss, you would not be able to deduct the rental loss”. Is this the same for a whole house? If I rent to a parent and I am charging much less than what I should, I cannot claim a loss on this rental? Is there any way for this place not to be considered a rental if it is for parents?

  17. 20. Tim-eh

    Bah.. nevermind. Found it here http://www.cra-arc.gc.ca/tax/business/topics/rental/fmv-e.html

    However, if my parents are only living in the upstairs, and I claim a reasonable amount for just the upstairs, and I do extensive renovations while they are there, it would be feasible that I have a loss.

  18. 21. moe

    what is CCA??

  19. 22. Singh

    If you own a personal residence in addition to the rental property does it makes sense to use the rent to pay down your personal residence? Since the interest on the rental property is tax deductible? And you can get a HELOC to pay the rental property (also tax deductible)… does this make any sense?

    thanks!

  20. Singh, if you have a rental property, you can use the rent in any way that you see fit. Ofcourse, it would be financially responsible to use the rent to pay down non-ded debt or invest in other assets.

  21. 24. JR

    “Moe what is cca”

    Laymans explanation … simply called ‘capital cost allowance’, a fancy term for depreciation.

    General rules are that any capital asset can be depricated as long as that asset is used in part to produce income for the owner, in this case rental property is one.

    If you hold a property within a numbered company (the suggested route) you can depreciate its value (from what you paid for it) bit by bit within the tax rules for depreciation of the type of asset class, to offset the income to reduce taxes as long as you have postive income from the rentals. They use this in industry for machinery, even the car rental guys do the same thing, writing down the value of the asset of all of those rental cars they purchase

    On property, you have to watch the recapture when and if you sell the asset, there may be a tax bill waiting for you .. unless of course you make the property inhabitatable (sush).. , thus making its value almost zero (land value only) … I’m not saying anythingmore, everything above board here!

    I suppose if you had a rental property that you lived in but you only occupied 10% of the dwelling and it was producing income, you had property management, maintenance, paid all those utilites and carrying costs .. then I suppose that would be one worth considering for CCA

  22. 25. Mike

    I have a rental house and I’m new to the game. The roof was leaking…so I changed the entire roof at a cost of $6,500. My accountant is advising me against claiming this as a repair expense, citing that I in fact did not repair the roof but rather installed a brand new roof. Is this accurate? So then I asked him whether or not I could claim this repair over a number of years, i.e. 20-30% per annum. He replied in the negative. Is this accurate? Am I hooped or is there any options out there for me to claim something to offset the income? I hope I can re coup some of the $6500 somewhere! Thanks for your thoughts.

  23. 26. JR

    Mike, I had a similar situation, in my case the repairs were wriiten off as a one time expense (note I said repair), since a roof replacement too me was always considered a repair. eg. removing the old one and replacing it, much like an oil change with filter replacement, or the replacement of an engine or tranny in your vehicle.

    If you were adding an addition to the property with new windows, doors and a new roof (first time), yeah, I’d say it was a capital expenditure

    Another example, and ask your accountant the following and also ask if he could give you a schedule of what in his mind is expense versus capital expenditure.

    If it was a furnace or water heater, gutters or windows being replaced, are these capital expenditures or expenses to maintain the property running in good condition for the rental income (categorize each one)

    I suppose his thinking is that its not a maintenance item (something that wears out), or general maintenance such as the property clean-up, snow removal, lawn care or pest control, but more of a capital expense.

    Be interested to get others opinions on this, and your feedback Mike

  24. 27. JR

    Mike, I found this, that may be of help.

    Dont know whether you are in Canada or the US, but my thinking is the same general rules apply.

    Go straight to the page “current or capital expense” for the acceptable definition of expense or CCA

    http://www.cra-arc.gc.ca/E/pub/tg/t4036/t4036-e.html

    Hope this helps

  25. 28. Mike

    Thanks for your thoughts JR and for the immensely helpful link…however, I’m still undecided….According to the set of questions presented on the CRA page:

    1. Does the expense provide a lasting benefit? I would say that adding a new roof (repairing…I mean) which comes with a 25 year guarantee from the company, provides a lasting benefit, and I doubt that this expense will reoccur soon. According to this criteria…I would have to admit to capital expense.

    2. Does the expense maintain or improve the property? I replaced a shingled roof with a shingled roof, therein restoring the property to its original condition. In my mind…..according to this criteria…this is a current expense.

    3. Is the expense for a part of a property or for a separate asset? The roof is definitely part of the dwelling and repairing it does not in my mind improve the property beyond its original condition (when I think original I think of when the roof was initially installed on the house…I don’t interpret “original” as being the eventual delapitated state the roof found itself some forty years after being installed). Current expense.

    4. What is the value of the expense? The house which I rent out (in the ridiculous Vancouver real estate market) is appraised at just over $600,000. The cost of my repair was 6,500. What constitutes “considerable” seems to be very subjective. Just over 1% of the total value? I dunno…I’m thinking current?

    I remember my accountant remarking that every rental house requires yearly repairs/maintenance, and this is taken for granted by the CRA. His thinking is that the average cost here (at the upper end) is around $2000 (not including property tax, insurance). He feels that claiming a $6500 repair expense would raise eyebrows. Moreover, he adds that raising the CRA’s eyebrows is not a good idea for a relatively young person (in my early 30s) to do because I have a long life of dealing with the CRA ahead of me. Oh, and did I add that I was audited by the CRA some two years ago (totally unrelated and bogus stuff) so my file is already flagged!

    Obviously, the safe route to pursue (the one advocated by my accountant) is to chalk this up to experience and to take consolation in the fact that I can claim the new roof as a capital expense should I ever decide to sell the rental property.

    However, I’m looking for a way in which to recoup at least some of my repair bill. Does anyone know if I can claim a portion of the $6500 to remain safe(r)? Say 20%? And can I do this for the next couple of years, as a deferral?

  26. 29. DAvid

    I believe the issue comes down to the question of repair or replace (a depreciated asset). I deal with this in other sections of rural construction, but I believe there are parallels:

    Did you repair the roof? No, you replaced it.
    Did you repair the 30 year old (low efficiency) furnace or replace it with a higher efficiency one?
    Did you repair the cut linoleum, or replace the floor covering?

    In all of these cases the repair is simply a fix, whereas the replacement makes the home more valuable to a purchaser. These replacements are capital improvements, and your accountant has given you sound advice. You should be able to rent your non-dilapidated house for a higher rate!

    DAvid

  27. 30. biff

    my situation:
    -renting (place#1)
    -wanted to move (place#2), paid 1st&last months rent (place#2)
    -still paying for (place#1)
    -had to back out of move…no refund for (place#2)
    -did not/could not sublet (place#2)

    can i claim the loss on my taxes for (place#2)? how/where?
    i’m not a business.

    much appreciated.

  28. biff, if you are the renter, there aren’t any tax deductions that I know of in that scenario.

  29. 32. Doug

    Im in the basement of my principal residence and renting out the main floor. I also have another rental property that has two suites. Im thinking of moving into the rental house. I dont plan on selling either now, but if I did, would I this one be tax free up until this year (no capital gains) but taxed based on the increase of value from this year forward?

    Also, still confused about CCA. Is it worth it to claim it to reduce my rental income to zero and get a bit of a refund?

    Can I claim it only on the rental house?

    What if I didnt claim it the first year I bought the rental house (5 years ago) but want to now – how do i determine the value of the building and the current cca now? Do I have to go back and refile all 5 years of taxes or can I just use the present value starting this year?

  30. 33. Mitch

    Looking at renewing the mortgage on a rental. If I were to apply for a cashback mortgage, would CRA deem the cashback portion as income?

  31. 34. Heather S.

    Hey!

    So my husband purchased our new house in his name only (credit reasons). We have a suite downstairs that is being renovated to meet the needs of a home based daycare.

    My question is this:

    Since I am not on the mortgage nor the title, how would I work things for my taxes?

    I was wondering how it would work if I “rented” the suite from my husband for 50% of the mortgage and then I would be able to claim it as an expense. Would he then just have to claim that income with his regular income? Would he be able to write off the things mentioned in this thread?

    Or should I be trying to get on title? Will it make a difference if I am not on the mortgage?

  32. 35. AL

    This is an old thread and not sure if it really belongs here, but my situation is:

    We are relocating for my husband’s job, which entails us renting a place until our purchased condo is ready. We are not selling our home, but have listed it with an agency for rent. We have used a HELOC for the purchase, and think we will name the new place the principal residence for GST rebate.

    My questions are:
    Can we claim costs,improvements on house made between the period of enlisting the agency and actually signing a lease?
    We have had an offer to rent a bit below our costs. Would this be smart to do , as we could deduct as a loss and potentially get a tax refund, and some help covering our costs would be better than none or totally stupid to take the risk of depreciation/frustration?
    Also wondering if we can we claim expenses for the move because it is work related, even though we did not sell our home? I have conflicting info on this.
    Can we do the Smith Manoeuver on the HELOC?
    Would it be better to keep the house as the principle residence for the 4 years allowed (worth more) while renting, as we may be ready to sell it after that time?
    Is there anything else we could do that I am missing?

    Lots of questions, I know, and I really should see an accountant, but I just wanted some initial feedback. : )

  33. AL, most of your questions are very tax intensive and with me not being a tax professional, i’m not comfortable giving you specific information.

    But based on what I do know, your old house is now considered a rental (once you move), so you can claim any business expenses associated including maintenance, agency fees etc. Personally, I would never rent anything below cost, but it’s better than nothing if you are in a tight market.

    If you are going to do the SM, you should consider getting a separate HELOC or readvanceable mortgage and it would clean up the paper trail. Otherwise, make sure that the HELOC has the ability for sub accounts.

    As you mentioned, you should contact an accountant.

  34. 37. soremedic

    I am looking at purchasing a condo as an investment property and was wondering if Condo fee’s would be considered a tax writeoff? We (I mean myself) hope to purchase within a year but I am still working on convincing the wife and am drawing up a proposal!!! Is a Condo a good route? More hands off by any chance?
    And a quick question a bit off topic, We are common law, I am a high income earner (80-90) and she is low (less than 20) and she is going back to school. We have never done our taxes together, what is income spliting? And would it be of benefit in our circumstance?
    P.S. Thanks FT your making me a rich man

  35. soremedic, as far as i know, you can write off condo expenses for a rental. The only problem with condo expenses for a rental in my eyes is that the condo development can raise the rates at any time with no input from you. This can potentially crimp the cash flow from the property. My number 1 rule for investment properties is that it has to be cash flow positive.

    In terms of income splitting:

    • the high income earner can pay all the expenses and let the low income earner invest in a non-registered account.
    • If you believe that you’ll be with your common law partner “forever”, you can consider a spousal RRSP.
    • When TFSA’s come out next year, it will allow the high income spouse to fund both TFSA‘s with no attribution rule.
    • All charitable donations should be claimed by ONE person, that will allow the donations to get over the $200 hurdle quicker.
    • All medical expenses should be claimed together by the lower income spouse
    • If you have children together, there are a bunch of tax credits/benefits that you can take advantage of

    Again, please contact a tax pro for specifics.

  36. 39. Dean

    Just have a few questions.

    1. I own a rental property with my spouse and half (in my nameand the other person only) with someone else. Am I considered to own two rental properties to get the deductions for the travel and automobiles?

    2. Is it possible to set up a “business” so that I can get other deductions on taxes? If so, would it be a rental business?

    3. I just bought a second rental property. I have a 40 yr. mortgage on it. Is is better for me to pay this off and use a HELOC and pay it off and then put the rent onto my current mortgage on the house I am living in?

    4. I could not see an answer above, but do the deductions of cell phone etc. get written off 100% or do you have to figure out the percentage that you used them to deal with your properties?

    Thank you!

  37. 40. DAvid

    Dean,
    You seem to be trying to manage a lot of things. You might be wise to contract an accountant to address your questions.

    I would expect there might be questions if you and your business partners claim deductions for the same items / tasks.

    Only business expenses are deductible. Thus the business use portion of the cellphone, business use of the vehicle, business use of the portion of your home where you manage your accounts, etc.

    It seems you already have a ‘business’, since your partnerships take you away from being a sole proprietorship, where many individual (personal) tax advantages accrue.

    DAvid

  38. 41. Terry

    FT: Great article exactly what I was looking for.

    We have one rental property only. It is currently in a negative cash flow position ie: the sum of Mortgage interest payment, property taxes and insurance plus some fix-ups I have had to do is below what I am getting in rent. Rent is at fair market value.

    Questions:
    1. I understand for income tax purposes that I can use this loss against other income. Does that income include salary from my job?
    2. Can I also include the CCA in my loss? This would increase the loss and decrease my tax liabilty in year.
    3. I did some fixes and some upgrades on the property. I did some general painting and then I also partially developed the basement to add to the living space. How do I determine what is capital improvements and what is expense?

  39. 42. Scott

    The house I live in is 1104 sq ft and I plan to rent out the whole basement and also a room on the main floor. I will have a rental income of $825 per month. What are some advantages and benefits of renting this space out other than the obvious income. I am single so I don’t mind giving up some space to generate some income. I just purchased the house for 245k and put down 20% which leaves a mortgage of $196k.

  40. Terry,

    AFAIK, yes, you can claim rental losses against other income like Salary. As for the other questions, you’ll need to consult with a tax pro.

    Scott,

    The only downside I can see is when you sell. Since you are renting out most of your home, you will be subject to capital gains tax. As I mentioned to Terry, you should consult with a tax pro.

  41. 44. Jim

    I own a house and recently bought another house to rent out to people. The bank is under the impression that I was going to rent out the house I already owned, and move into the new house (but I am not moving, and am renting out the new house). I did it like this because if I wanted to get a mortgage on a rental property they wanted 25% down, but to get a primary residence need little or no down payment.

    I would like to make it known to the bank that I am not moving into the other house, or should I say that I didn’t like the neighborhood and so i moved back to my original house? Secondly, is their any implications at tax time, or can i just claim expenses like normal. Does the tax man even have any idea about my mortgage company or anything else.

    A financial advisor was the one to actually suggest the idea that I used above to get the rental property.

  42. 45. D

    IMO….I think this would be looked at as Mortgage Fraud. I know a lot of people do this kind of thing now, but it is a “bit” shady. I am no pro, but just going by what my banker told me when I was looking at doing the same thing

  43. 46. Russ

    Dear Mr. Frugal Trader,
    My questions are multiple, and I understand if you cannot provide answers to all, or even most of them, but here goes:
    - I am 47, married, no kids (long story)
    - I have principal residence, $300,000 value
    - no mortgage, but $70,000 secured LOC against property
    - I would like to build a new house, mortgaged to the balls, and rent out
    my current home.
    - I have done some number-crunching, and it looks feasible, but I don’t really know where to start, as far as:
    1)Should I convert LOC to mortgage for current home?(LOC provides cash flow flexibility, as it is “interest only”, floating rate)
    2)Should my current home be in a numbered co. when I rent it? I currently run my construction business as a #’d co, “operating as…”.
    3) I have some relatively costly repairs and replacements to do, ideally before renting. How should I approach these, to maximize deductibility, etc.?
    4) Should I be considering using equity in current property i.e. borrowing against it to maximize downpayment on new house, then using borrowing expenses on rental to minimize rental income? Is this a wash?
    5) Should we even be considering this in this potentially volatile real estate market (Alberta)? My retirement years are looming larger every day, and I would like to make some solid financial gains without being completely exposed to the “shell game” that the stock markets have become.
    Thanks in advance for any advice you can provide.
    Russ

  44. Russ, your situation is quite complicated and only a professional can give you proper advice. I would recommend that you speak with a chartered accountant to set up you rental business properly before proceeding.

    Another thing to consider is, are you sure you want to get a huge mortgage on a new home before your retirement?

    If it were me, I would maximize the rental mortgage due to the tax deduction but aim to pay off the principle residence mortgage.

  45. 48. Mike

    I own a house (well, the bank does anyways) and I rent it out. Just wondering if I can write off the purchase of a digital camera/digital recorder in whole or in part…in order to take before/after images of the dwelling for damage deposit purposes, or for other potential contentious legal matters. Anyone have an idea? Thanks.

  46. Mike, it depends on the “usage” of the digital camera. If it’s 100% for the rental, then sure, you can deduct 100% of it. However, if a portion is used for personal, then the deductible amount will be reduced by that %.

  47. 50. barb

    i wondered if i was to rent a room off my ex for 100 a week would he have to claim that as income and also my daughter says if we both live at the same address for more than 3 months we have to file our taxes together we are not married

  48. 51. Hema

    We are planning to purchase a home with a legal basement which is currently rented for $950 per month.Also the house is offered for sale at about $50,000 less from the listed price.I want to know like how tax is calculated for the income from a legal basement and are there any other things which we need to know before buying this property. Sinc ethis is my primary residecnce and sinc eiam buying it for a less price will i be eligible for tax when i sell this property after a couple of years.

  49. 52. Kyle

    Hema,
    (correct me if I am wrong anyone) If you purchase the place with a legal basement and intend on renting it out I believe you will be able to deduct a portion of your mortgate interest, and be able to deduct other expenses like the marvelous FT has listed. Life FT and many other people say throughout this website, Talk to a KNOWLEDGABLE accountant, and there are many out there. I am by no means an accountant but am begining to learn the principles. You should also be questioning why the house is 50 000 less. Have you had a propery assessment, if so, maybe you should have another. And I am not sure how it works, but are you moving into the house with a tenant already there? If so, it could be good, or very very bad. If you write a portion of the house off as CCA (read up on this on your own) you may pay tax, I am still learning myself about this) check out
    http://www.cra-arc.gc.ca/E/pub/tg/t4036/t4036-e.html#P360_33597
    so basically (again, correct me if I am wrong) lets say you pay 10 000 a year in interest, and 20% of your house is the rental basement, you would be able to deduct 2000.00 on your income tax as a deduction. So…
    950x12months = 11 400 rental income
    11 400 – 2000 = 9 400 total rental income
    lets say you have other deductions that total another 2400 (CCA, repairs, maintenance, etc_)
    9 400 – 2400 = 7000 total rental income
    that is the amount you would claim on your income tax and the amount you would be taxed at. Again, ACCOUNTANT. Hope this helped.

  50. 53. Kyle

    quick few questions to everyone!
    I cant find anywhere that says for how long I can show a “loss” on my rental property?
    I plan on moving back home and renting out my current house in the spring. I was wondering if anyone has done, or does, use ‘inovative’ ways to show a loss, or if it is even feasable. I am in a higher tax bracket with my personal income. any help anyone? And I am in search of a new accountant who is familiar with my situation but thats my problem ;)

  51. 54. Kyle

    I plan on finishing the basement between now and the spring. Would I be able to deduct any expenses associated with that even though its prior to earning any income?

  52. 55. Eastvanman

    I am planning on repairing a fence at a rental house which i own. Does anyone know what my options are in terms of maximizing the probability that this action would be deemed a “repair” and not a “capital investment”? Thanks.

  53. 56. Fallgy

    Hello,

    I own rental property in RI, and I live upstairs and am going to rent the downstairs. I have $12,000 in repairs in the downstairs apartment due to a rotten sewer pipe that collapsed the ceilings in the living room and kitchen. This left me with a vacant apartment, and huge repair costs. What percentage would I be able to write off from the 12,000? and what kind of return would that leave me?

    Thanks

  54. 57. Mark

    Hi Everyone,

    I know this is an old post, but could somebody tell me how I could claim improvements made to a condo in 2007 (bathroom upgrades cost $4000 in Dec. 2007) before we rented it out (started renting in Jan. 2008), so I can use that capital cost as a deduction?

    Many thanks!

  55. 58. Elbyron

    Mark – your improvements should be considered capital expenses. Normally, you can deduct their cost over a period of several years as part of your capital cost allowance (CCA). For more information on CCA, see http://www.cra-arc.gc.ca/tx/bsnss/tpcs/rntl/cca-dpa/menu-eng.html

    However, there are two reasons these expenses might not qualify:
    1) They may have been incurred prior to the condo being available for use. See http://www.cra-arc.gc.ca/tx/bsnss/tpcs/rntl/glssry-eng.html#Availableforuse for a definition.
    2) The expenses were incurred in 2007, and I’m fairly certain that you can only claim CCA for improvements made in the current tax year.

    Also, if you’re in a low tax bracket or you plan to sell the condo soon, you might not want to claim CCA. This is because in the year you dispose of rental property, you may have to add an amount to your income as a recapture of CCA (see post #5 and others for discussion). Note that you cannot claim CCA if you have a rental loss (rent doesn’t cover expenses), or if claiming CCA would result in a rental loss.

  56. 59. Sabrina

    Great info FT and tons of great questions and answers. I have owned my first house and rented out a portion of it since I was 21 and have always claimed the rental income and expenses incurred.

    Recently I decided to purchase and move into a second house and rent out a portion of it aswell. Initally I tried to sell my first house but when it didn’t sell before I moved into the new house it sat vacant over the summer until I could find a suitable tenant. Finally in September I found someone to rent the old house and take over the bills (utilities had to remain on as it was on the market). My question is if I can claim a loss of rental income for the few months over the summer that the house was vacant and if I can claim the bills aswell. I currently rent the entire house for $1250 plus utilities, which is at the market norm for my area.

    Thanks in advance.

  57. Sabrina, to my knowledge, providing that you “intended” to rent out the house while it sat vacant, then you can claim the expenses (even at a loss). However, as I’m not a tax professional, you should consult an accountant to verify.

  58. 61. Beth

    I am getting ready to rent my primary residence for the first time, expected to lease beginning Feb 2009. In late 2008 I started to make repairs to my house to get it ready to rent (new carpet, paint, cleaning, etc). I also paid to have it listed on three websites. Can I claim any of the repairs I made in 2008 even though I wont rent the propety out until Feb 2009?

    Thanks.
    Beth

  59. 62. Jamie

    Hi,

    Here is my income statement for 2008

    Rents: 3200
    Expenses: 8500

    Capital Expenses: (furnace) 4200 Purchased in Nov 2007.. half year rule.

    Would I claim my furnace as a capital expense for 2008 taxes, and what percentage will I get back every year?

    Thanks!

  60. 63. Clay

    Question? How do I get back some of the funds I’ve had to spend as a lost. I have a unit that I can only rent for $1200, but my mortgage is $1750.00, plus I have to pay the association fee of $95.00 each month. Is it possible to claim a lost on the $645.00 I must spent every month, plus the taxes paid quartely.

    Help!!

  61. 64. Mark

    @ Elbyron,

    Thanks very much for the reply.
    So what I’m reading, it’s not in my best interest to even try for the CCA?
    Or, it may not even be possible?

    How can I find out for sure?
    What 2008 tax-year forms should I be completing to even try?

    Thanks again,
    Mark

  62. 65. islandinvestor

    Hello

    I recently purchased a rental property that had a unfinished basement i have a contractor finishing the basement are all the reno’s a tax rite off? also are cmhc fees a rite off because i only put five percent down?

    Thanks

  63. 67. Francis

    Hi,
    I purchased a condo in Dec 2007, and rented it out in 2008. Can I deduct legal fees for the purchase of my condo as my expense or should it be deducted when I decide to see the condo.
    Also I provided a new Fridge, Washer and Dryer to the tenant. Can I deduct the total cost of the appliances or should it be deferred as 20% capital expense. Pls advise

    Thanks
    Francis.

  64. 68. ?Anybody?

    I own a home, and when I got my mortgage the home was to be my primary residence. Because of economic times I have been force to postpone my residence in this home and have rented it out. It is rented at fair market value but below the my monthly mortgage. Subsequently I have purchaced a condo in which i will use a temperary Primary residence.
    Questions
    1. If I rent my first home out at a continued loss, will it still be considered an investment property. ( I will be Subsidizing the difference)
    2. If in the future, should I be in a somewhat better finacial position and decide to move into the first property, and sell the second (substantially Less expensive property) – would my first property then become my primary residence, and if so, some time in the distant future, should I decide to sell said home, would it be Capital Gains free, as I rented it out for a period of time?

    I just don’t want to have to plead ignorance if/when the tax man gives me a call.

    Thanks

    Guy

  65. Yes if you rent out the home, it will be an investment property.

    When you rent out the first property, keep in mind there is a tax rule that considers you to have sold the property at fair market value immediately before the change in use and re-acquired it immediately after. This change in use rule applies again when you re-acquire the property. This means that you will have a taxable capital gain in the future.

    There may be some relief, but you should pay for some advice. Also see the CRA document http://www.ccra-adrc.gc.ca/E/pub/tg/t4036/README.html

  66. 70. cfly

    I have purchased a condo as a rental property. I have 10% as a deposit that will be held in trust until construction is complete in late 2010. I have read the comments on the board regarding purchasing the condo using a numbered company to maximize my tax deductions.

    Also, would I incur capital gains when the time comes to sell.

  67. 71. Jason

    Quite a popular post with lots of good information!

    I bought a 2 apartment house in St. John’s in 2004. Since then I have been renting out the basement apartment and living upstairs. I claim the income from the apartment and deduct expenses as per the CCRA requirements. Personal use is calculated at 58%, investment use is 42% base don square footage. That has been fairly simple for me so far.

    I just bought a new house and I want to keep the house I bought in 2004 and rent it out on the top as well as the bottom. The value of this house has increased by 40% or $66,000 in just under 5 years. I want to do a 90% equity take out from this house and apply it to my new house mortgage. Will I have to pay capital gains tax on the proceeds of the $66,000? Any idea how much? Will I have to pay this in 2009?

    Thanks,
    Jason

  68. Jason, capital gains tax will only need to be paid when you sell the rental property.

    Note as well that if you re-finance your rental to purchase a principal residence, the new refinanced portion will not be tax deductible. You should confirm this with a tax pro however.

  69. 74. Marc

    I have bought land and am planning to build a rental unit on it. Can i write off the interest charges on the line of credit I used to purchase the land.

    Thanks

  70. 75. DAvid

    Marc,
    As bare land, probably not, as (generally) land appreciates, but does not generate income. If it was arable land which you leased to a farmer, to generate income from the lease, or if you operated it as a parking lot until you built, then you might have an argument that the purchase was to generate income. However, since bare land is purely speculative until further developed, I would expect no deduction on the interest.

    You should double check with a tax accountant.

    DAvid

  71. 76. The Truth Hurts

    Can some explain to me how is it possible to make money on rental income with this reasonalbe scenario. Lets say you get some residential property, worth $400,000. You estimate about $2500 in gross monthly income, and after various expenses and deductions, lets say you net about $1300. At the highest marginal tax bracket (approx 46%), you pay $600 on that, leaving you with $700 true after-tax dollars.

    Even with a reasonable 25-30% mortgage downpayment on your rental property, I think you are going to need at least $1500 a month to have a reasonable 15-20 yr to having property fully paid off. So, that $700 a month is not going to cut it.

    Ok, how about in the scenario where you had $400,000 lying around and bought the propert straight out without any mortgage, just looking for regular monthly cash flow. Yearly, $700 x 12 month gets you $8400/yr. That represents are mere 2.1% annual return on your investment of $400,000.

    Am I missing something?

  72. 77. Realinvestor

    Th Truth Hurts,

    For investment property mortgage interest is tax deductible. However, based on the scenario provided the investment is not worth it.

  73. 78. The Truth Hurts

    Running through various scenarios, I’ve come to the conclusion that if you are in the highest tax bracket, it is more challenging regarding getting property for the purposes of rental income.

    Because your net rental income (minus deductions, mortgage interest, etc) is taxed at your own personal tax rate, if it is taxed at 46% (highest marginal rate), you have much less left to pay down the mortgage than if you were lets say taxed at 31%.. That 15% difference could easily make-or-break the profitability of rental property investment.

    If I don’t have a lower income spouse to ‘pass’ the rental property to take advantage of a lower marginal tax rate, what other options are there? Does doing this thru a corporation help with this problem? (I just find it hard to believe the tax system would make it prohibitive for top tax bracket individuals to invest in real estate for rental income purposes. There must be something missing).

  74. 79. Kid

    My mom wants to give me her rental property. What the best tax saving method of doing this transaction for both of us?

  75. 80. Newbie

    I just purchased a home and I’m planning on renting it in the near future. Since I’m a newbie here, excuse my ignorance in advance…LOL!! I was thinking of renting half of it and keeping the rest for myself while I renovate that too, with the option, in the future to rent the basement as well?!? I have a couple of questions with regards to my situation:

    1. I want to take advantage of the HRTC tax breaks. I understand if I’m using the property as a rental, then I can’t take advantage of it? Would it be beneficial to wait on renting, do the renos and then look for a tennant or is it more financially befeficial to get someone in there as soon as possible.

    2. I’m an instructor for a local college and collect EI when I’m not working in the summer. Will the potential rental income have a negative effect on my EI claim? I’ve been told that I won’t be able to collect at all if I’m collecting rent?

    Any pointers or opinions would be greatly appreciated… thanks in advance!!!

  76. 82. Mark in Nepean

    Question for All:

    If you sell your rental property….are your real estate agent’s/broker’s fees to sell the unit tax deductible??

  77. Mark, the agent commissions would be considered a business expense (afaik), thus deductible.

  78. 84. Mark in Nepean

    Thanks FT!

    So did you include your agent’s commissions in your income tax filing Frugal – since in the last year, you sold your rental property??

    How much (approximately) did you claim as a deduction when you sold your rental unit? I assume it was a few thousand as an expense??
    (This is obviously great news!)

    Does the agent’s commissions only apply if you’re “a business” – meaning I am not incorporated. Can this deduction apply if you are in a “co-ownership” (i.e., I own it with my wife?)

    …After an interesting year (more downs that ups) with the rental property, I’m thinking of selling but I want to know what I’m getting into and what I can get out of it, re: income tax deductions.

    Thanks for any advice and information you have FT!
    Cheers!

  79. Mark, if you use an agent to sell, the cost of the agent would basically increase the cost base of the rental property, thus reducing your profit (and tax) accordingly. For my situation, I sold privately, so I didn’t have any commission to pay. But similarly, I will use the lawyers fees to raise the cost base of the rental property.

    Yes, co ownership or not, owning a rental property is considered a business which does not need to be incorporated. In fact, I see very little value incorporating a rental business.

    As well, note that you can claim what the agent charges before GST/HST.

    As you know Mark, the regular disclaimers apply. I’m not a tax pro, you really should contact an accountant with your questions to verify your findings.

  80. 86. Mark in Nepean

    Yeah, thanks FT….re: your rental experience.

    I agree, I see little value in incorporating our rental property as business, and as such, I have not done so over the last 2+ years.

    That said, if we plan to go ahead with the sale this winter or spring, hopefully all will go well.

    I hope to put the equity we’ve gained, into CDN dividend-payers, likely DRIPS in a non-registered account.

    On that note, I think it would be interesting to create a brief post on DRIPs, to get some more dialogue going on the subject. If done consistently, DRIPS are certainly great wealth instruments! Did you read about Carl Anderson in this month’s MoneySense Magazine??? Seems like a good role model to me!

    And don’t worry, I always do my homework, but I acknowledge your need to post the usual disclaimers….

    Cheers!

  81. Mark, I have a post coming up on DRIPs, should be posted within the coming weeks.

  82. 88. lk

    Would you be able to explain the tax treatment on the following scenario:

    My mom & brother have co-owned a property for 15 yrs and have rented it out since the date of purchase. My brother now wants to use the property as his principal residence. How would my mother report the change in use of this property for tax purposes — would this trigger a capital gain for her? Same question for my brother? Would the capital gain be eliminated for him since he will be using the property as his principal residence? They have claimed CCA on the property in the past, if that matters.

  83. 89. Paul

    I bought a property in Florida, US as an investment but I’ve traveled a lot scouting for properties.

    1) Can I claim my travel expenses (car mileage, gas, boarding, meals) while scouting? I’ve actually put offers at potential properties but didn’t work out.
    2) I’ve traveled to Florida
    – once for scouting properties
    – once for inspection, after the offer was accepted
    – once for closing.

    Which part of these expenses can I claim? and what can I claim?

  84. 90. Mandy

    Can anyone help with following scenario?

    My employment income is quite minimal.

    This year we did extensive repairs to our rental property – which will result in a large net rental loss.

    After claiming the loss to reduce my employment income – I will still have quite a large loss left. How many years can I carry this forward and what types of income can I use this against in the future? Is it only rental income or can I use it to reduce any type of income ie capital gain etc?

  85. 91. Eastvanman

    I need to repair a dilapidated fence (old wooden fence) around a rental house. Given the size of the area which is enclosed, I figure that the cost of putting up a new cedar fence (labor included) would be between 5-6 thousand dollars. I was thinking about doing this in sections, say 2K dollars worth per year and claiming it as an expense to offset against my rental income. Does this seem reasonable?

  86. lk, paul, to be honest, I’m not sure what the right answer is for your situation. Best to contact an accountant, I’ll ping my sources to see if I can get some answers.

    Mandy, Eastvanman – you need to be careful what you claim and how you claim it. If the repairs were a capital improvement, ie. new flooring because old flooring was ugly, then you’ll get to claim capital cost allowance on the upgrade where you can depreciate the certain percentage per year. If it was truly a repair, then you can claim the whole amount this year. The line can be a bit grey at times, here is more info:

    How Capital Cost Allowance Works (CCA)

  87. 93. pravspress0

    Are condo maintenace fee’s considered a deduction against rental income if the dwelling is used as a rental property?

    Our maintenance fee’s are $805.mth. Ontario.

    cheers

  88. Seems logical to me that condos fees would be considered as an expense. Best to break down what exactly what the condo fees consist of and consult a tax pro to see if the deduction holds.

  89. 95. Tammy

    In Canada where can I claim a loss for a month an apartment sat empty that I own?

  90. Tammy, afaik, as long as you have the “intention” to rent it (ie. for rent ads), then you can claim the loss. I believe though that CRA expects you to rent it out after a period of time.

  91. 97. Keewatinrental

    Question 1:
    I am confused regarding the GST rebate and gst paid while renovating/ repairing rental property as well as GST pd on vehicle expenses such as fuel and repairs.

    When I am deducting my rental/vehicle expenses do I claim the whole amount (including taxes pst/gst) or do I have to deduct the gst and then separately claim the GST rebate?

    Question 2:
    We have an office within our home where we store past income tax returns, computer where I pay rental bills etc. I am able to expense any costs for my home office under our rental properties?

    We have a duplex with two suites in another province (2 hrs away), one rental home in the same town where we live and another vacation/rental property (newly acquired and plan to rent out this summer).

    THX

  92. Keewantinrental, with regards to question 1, GST is calculated separately from other deductions. However, I’m not sure how GST works with rental properties as GST isn’t charged on rental income. About the home office, if you run a substantial rental business, then there claiming some office deductions is a possibility. However, you should consult with an accountant to get the facts.

  93. 99. Jared

    Does anyone have an excel spreadsheet or have a link to one that will help analyze Investment Properties for Canada? I have looked a few online but the ones I have found are all based on the US .

  94. 100. paul

    we live in alberta,i make substantially more than my wife and we “income share” already.We’re going to purchase a rental property in BC that’ll make aprox 100 a month.Should we start a numbered company,in whose name,if in mine, should i hire her as an employee?If so,do i need to pay workmans comp?,what can we claim for expenses(ie office space in our home? etc)We’ll have plenty of expenses to claim as it’s a long way from us,so plenty of travel initially etc.would it be better to start a company in Alberta or BC,taxes are better here,but the property is there?Sorry for the repeat questions.It’s all new to us and quite overwhelming trying to decide the best way to eliviate taxes.

  95. 101. FrugalTrader

    paul, my understanding is that forming a corporation provides little benefit for a small time real estate investor. There may be some extra liability protection (house insurance covers a lot of it), but rental income is taxed at the highest corporate rate. I would recommend that you speak with an accountant before proceeding.

  96. 102. newfiegirl

    Hi Frugal Trader,
    In 2009 we sold two rental properties. There was no capital gains because they were sold for less than their initial purchase value. We did however clain CCA for twenty years and have depreciation recapture. Can you explain how this works – formula? For tax benefits – is it best to have the value of the land included in the sale higher, lower, or same as the initial cost?

  97. 103. Pete

    Hi newfiegirl ,

    You should keep the percentage constant between the house and land values.
    Unless you let the house rot, then its value could go down , while the land stayed the same or went up. To pay the least tax , hopefully your land went up and the house rotted, but you had better be prepared to back up your statements. Keeping the percentage constant is the normal thing.

  98. pravspress0,

    Yes, you can claim condo common elements fees/condo fees. We have for the past two years. Those costs must be filed on your T776 form. If you don’t know what I’m talking about, I would suggest you consult a tax accountant.

    Good luck!

  99. 105. Newfiepet

    I’m in the process of doing my 2009 taxes using Quick Tax software. After selling property in 2009 I am left with a Recapture of CCA of $130,000 however because the buildings depreciated in value due to market conditions in our rural area I have a Capital Gains Loss (Line 199) of $26,000 that apparently cannot be used against my taxes this year. Is there anything further I can do to reduce income tax, other than regular expenses.

  100. 106. bal grewal

    Hi from a new subsciber my question is four years ago my wife and i purchaced a house for our son who was eighteen at the time and just graduated.the plan was to put the house in our name along with the house hold bills heat hydro and so on we are now looking to put the house in our sons name how would i do this minizing all gains and keep the tax man happy

  101. I have a condo in NJ that I lived in. I then moved to MD in July of 2009 and I am still there. I put the condo up for rent but never found any body. I advertised etc.
    Can I take any deductions for 2009 and in future?

  102. 108. Thelma

    I have a question: I am renting out my principal residence (temporary) in Maple Ridge, BC for about a year, at which time I am moving back. My mortgage payments are$1860 per month, and I am renting the unit (townhouse) for $1700 per month. Do I still report this as an income? I also pay the taxes, levies and insurance on this townhouse. Thank you

  103. 109. FrugalTrader

    Thelma, you may want to double check with your accountant, but I believe you can claim the loss on your rental against your regular income (if it’s under your name).

  104. @ Thelma,
    Yes, as far as I know, you need to claim that as income.

  105. 111. Marie

    On the Canadian guide it says repairs to make a property suitable to rent are capital expenses, but on the next page it says repairs are current expenses if they were necessary. What does necessary mean? I replaced a rotten deck with new wood, and I replaced a main floor bath because of rot, I replaced a dead furnace and fridge, and I gutted the basement apartment because it was mouldy. I see all these as necessary, but are they??

  106. 112. DAvid

    Marie,
    Here’s my take, though I’m not an expert:

    “I replaced a rotten deck with new wood, “
    If you did more than just replace a few rotten boards, and have increased the value of the property then I would consider it a capital improvement. Had you replaced a large rotting deck with a set of steps to access the door, then it would be repairs.

    “and I replaced a main floor bath because of rot,”
    Again, if you did more than necessary to make it safe, then you may have gone beyond “repairs”

    “I replaced a dead furnace and fridge,”
    If both are beyond repair, then “repairs”. Replacing a leaking hot water tank would fit this category as well. If on the other hand your reason for replacing the furnace (or fridge) rather than repairing it was to recoup costs on the energy savings of new, efficient equipment then you are back into capital expense.

    “and I gutted the basement apartment because it was mouldy.”
    Capital expense. If you have a writ of some sort against the house you may be into a repair, however, usually mould has to be pretty severe to ‘gut’ the space rather than effect repairs in simpler fashion.

    It sounds like you bought a “fixer-upper”, which you have decided to rent. If you looked at it in a slightly different fashion, it might be clearer for you. Say you bought the same house (a depreciated asset) to flip in the real estate market. Which of the tasks you describe above would be done to improve the real value of the house, versus which would maintain the status quo — as a living space? Once you go beyond addressing safety issues, you begin to add value. Clearly many of the tasks you describe would add value.

    The CRA may allow some of these depending on the actual situation — speak to an accountant for real advice.

    DAvid

  107. 113. Laurie

    Under the category “insurance” as a deductible expense, does that include mortgage life insurance paid on the rental property or only property insurance?

  108. 114. FrugalTrader

    Laurie, I’m not sure about mortgage life insurance, but property/fire insurance is definitely deductible.

  109. 115. Brad

    Late response to the question regarding the new roof, but I found this in a CRA interpretation bulletin from 1985:

    “(b) Maintenance or Betterment Where an expenditure made in respect of a
    property serves only to restore it to its original condition, that fact is one
    indication that the expenditure is of a current nature. This is often the case
    where a floor or a roof is replaced. Where, however, the result of the
    expenditure is to materially improve the property beyond its original
    condition, such as when a new floor or a new roof clearly is of better quality
    and greater durability than the replaced one, then the expenditure is regarded
    as capital in nature. Whether or not the market value of the property is
    increased as a result of the expenditure is not a major factor in reaching a
    decision. In the event that the expenditure includes both current and capital
    elements and these can be identified, an appropriate allocation of the
    expenditure is necessary. Where only a minor part of the expenditure is of a
    capital nature, the Department is prepared to treat the whole as being of a
    current nature.”

    Link is here: http://www.cra-arc.gc.ca/E/pub/tp/it128r/it128r-e.txt

    So it looks like replacing a worn out roof, as long as it is of same quality as the original, counts as current regardless of how that impacts the value of the home. Does anyone have any experience deducting roof replacement as current expense?

    I’m looking down the barrel of a costly roof repair myself.

  110. 116. FrugalTrader

    Brad, my understanding is that you can claim it as a current expense providing that it was a repair and not an “upgrade”. Looks like a leaky roof that required replacing would count as a repair to me, but you should double check with an accountant. He/she should be able to tell you right away.

  111. 117. Terry

    This just keeps growing. I posted a question here back in 2008, got a good answer and now I have a new question. On July 1 2009 I stopped renting my property and moved in so now it is my principle residence.

    First question: Am I correct that I can claim all the expenses on the property that I incured in the first 6 months (including the portion of the property taxes, Mortgage interest, utilities that the renters did not pay, repairs due to the renters breaking things like a door etc.)

    Second Question: I have my sister and her friend living with me and they pay me rent. If I do the calculations they are paying me well below 2/3′s of what my monthly expenses are on the house. Do I need to include this rent as income and then do a calculation on the expenses to offset this to $0. Or do I just consider this to be a cost sharing arrangement? No one is claiming expenses against the rent even though my sister is self employed.

  112. 118. Chris

    Laurie.
    Mortgage life insurance IS deductible IF it is required by the bank. In other words, if the bank requires you to have life insurance to cover the mortgage, then it is deductible. Otherwise, it is not deductible. <- this is why life insurance proceeds are also not taxable
    HTH

  113. 119. Allan

    I have a renatl property, can i claim a home office deduction, does Revenue Canada normally accept this as a deduction dor someone with one rental property?

  114. 120. ted

    we have 3 rental properties in canada, my employment income is in the U.S.
    should I file Canadian rental income and U.S. employment income separately?

  115. 121. Brooke

    Here’s a scenario… think it’s worth it?

    House price: $300,000
    Down payment: $60,000 (20%)
    Mortgage: $240,000
    Rate/term: 4.5% five year fixed
    Amortization: 20 years

    Rental income: $3,000/month
    Mortgage payment: $1,513/month
    Loan repayment: $320/month
    Property taxes: $300/month
    Insurance: $100/month
    Heating: $125/month

    Profit flexibility (maintenance/repairs): $642/month

    It’s a 3-unit house drawing in $3000/month. We would have to borrow most of the down payment but the tax is deductible and we can get a pretty good rate (2.5%) so that seems reasonable.

    It would be a partnership between myself (30) and my dad (55). I’m thinking he”ll want me to buy him out at the 15 year mark.

    What do you think?

  116. 122. FrugalTrader

    @ Brooke, you should build in vacancy (http://www.google.ca/search?client=firefox-a&rls=org.mozilla%3Aen-US%3Aofficial&channel=s&hl=en&q=cmhc+vacancy+rates&meta=&btnG=Google+Search) and maintenance into your expenses, then see what the cash flow is like. My rule of thumb is that the property needs to be cash flow positive after all expenses, including vacancy and maintenance.

  117. 123. Brooke

    Hi Frugal:

    Vacancy rates for 3+ unit properties are 2.3% (2009 CMHC report), up 0.1% from last year in my city. How do I factor that into the equation?

    As for maintenance, I’m a homeowner (only 5 years) and ex-renter (2 years and never called the landlord once) so I have some understanding of things that can crop up and need fixing/replacing, but how do you guesstimate rental property maintenance expenses?

    The furnace and roof “should” be good for at least 10 more years. I’ll take care of the yard in the summer and driveway in the winter since I only live about 5 minutes away from this property.

    Is there an arbitrary % of monthly rent you should set aside?

    What kinds of maintenance things have you seen crop up over the years that were kind of unexpected?

    Thanks for being such a great resource! I think I’ve read every comment made in this blog posting and a few others! :)

  118. 124. Brooke

    I guess I should mention that the vacancy rate for this 3-unit property has been 0% for the last 17 years. The tenants the current owner aims for are paramedics, doctors, lawyers, etc. (we know as he’s been a long time friend of the family). New tenants have always been referrals and lately he’s seen demand pick up (he usually has to turn away a few people per month).

  119. 125. FrugalTrader

    Brooke, I just asked Rachelle, who is a columnist here and she usually uses 10% for maintenance and 5% for vacancy. Of course, these are simply estimates.

  120. 126. Bonnie

    Hi there, I am trying to get clearer information on claiming rental income versus business income. I have 7 rentals (in BC) and spend much of my time managing them, yet, as rental income I cannot write off a portion of my house as an office for running these rentals. Any advice? Can I claim as Business Income instead? Any reference material? CRA says “In most cases, you are earning income from property if you rent space and provide basic services only. Basic services include heat, light, parking, and laundry facilities.If you provide additional services to tenants, such as cleaning, security, and meals, you may be carrying on a business. The more services you provide, the greater the chance that your rental operation is a business.” I do maintain the properties and provide yard clean up and grooming. Thank you for your time.

  121. 127. DAvid

    Maintaining the property is not “service to tenants”. Note the the CRA description includes services of a more personal nature: meals, (house) cleaning, and security. I believe the CRA description would include a care facility, where you provide services such as meals, cleaning, laundering, but not an apartment building(s) where you have to maintain the property in appropriate condition.

    DAvid

  122. 128. Ernest Wiseman

    I have rental properties. Please send me any/all information i need regarding when i need to send in taxes? How i am to calculate the correct amount of tax to send in to Revenus Canada?? What are my tax breaks (if any)???
    This information will be greatly appreciated as soon as possible.

  123. 129. Walton

    Can I claim rental expenses and loses if I cannot rent the property for the entire year? That means I do not have rental income at all for the entire year. Am I eligible for any rental expense claims? Will CRA allow it?

    Thanks

  124. 130. FrugalTrader

    @Ernest – I recommend that you contact an accountant for the required paperwork.

    @Walton – My understanding is that as long as the intention was to rent out the property (ads in the paper etc), then it can be claimed as a loss. You should double check with an accountant though.

  125. 131. Walton

    Thanks very much FrugalTrader.

    Can you explain a bit more on the recapture of CCA?
    I know I cannot claim CCA to create a rental lost. But if I have already a rental lost before CCA, can I claim it to increase the rental lost?

    If I sell the rental property after several years, how is the recapture of CCA calculated? Will all the CCA be added to my income at the year when I sell the property?

    Thanks again,

  126. 132. FrugalTrader

    @Walton, check this article on how cca works, especially the comments.

  127. 133. Money Mama

    Lots of fabulous advice here! Thanks!

    I have a question that doesn’t appear to have been answered. My husband’s name is the only one on the title, but I claimed the rental income for 2009. He is the bread winner and I stay at home, so I am the one who handles the property. Is this allowed, or does he have to claim it on his taxes, and do I have to go back and redo last year’s as well?

    Thanks so much in advance!

  128. 134. Sandi Bailey

    I rented my house out from Nov 2008 to March 2010. I moved back into my home ( was in Cali renting a home for work related reasons) in March 2010. The renters I had in my home were very hard on it. I had to make several repairs and replace the carpet, redo the kitchen cupboards ( some broken, some very scratched) and make many other small repairs before moving back in. Can I deduct the repairs I made from my taxes? I am confused about this since I was not renting it out again and moving back in myself.

  129. 135. Bonnie

    If you were claiming rental income for the nov to march period, your expenses relating to the rental are able to be deducted. Unless they are a capital expense. For example; mortgage interest, hydro, property taxes, landscaping, bank fees, etc.

  130. 136. Fabio

    Hello,

    I already own a few rentals here in canada, now wishing to buy a property in Florida. I would rent as a vacation home for seasonal purposes, can i claim expenses and claim any losses against my other incomes.

  131. 137. Mindy

    I purchased a rental property which closed on 10/26/10. We painted, made repairs and cleaned it up and placed it for rent in mid to late November. Can I show no rental income on my Schedule E and still claim the repair costs, insurance, utilities, etc that were out of pocket for Nov. and Dec.? As of today, it is still not rented but I do advertise weekly.

  132. 138. FrugalTrader

    @Mindy, you should check with an accountant, but if you purchased the property as a rental, then you should be able to claim the expenses incurred to preparing it to be rented.

  133. 139. Dean

    If you can’t deduct the mortgage principal from the gross income, then you are paying tax on that (even though you technically don’t receive it, just pay it to the bank). When you then sell your rental property down the road, you are taxed on the capital gain. So aren’t we being taxed twice on the same money?

  134. 140. Ed Rempel

    Hi Dean,

    No. The principal portion of the mortgage payment is not deductible because you are not paying an expense. You are reducing debt. Only expenses are deductible.

    The capital gain you are taxed on when you sell is based on the gain or loss from your cost of purchasing the property, not from the mortgage balance. Paying down your mortgage does not increase your capital gain.

    Ed

  135. 141. Bonnie

    Hi.

    So if my husband, the higher income earner, pays me to collect rents, repairs, etc, he can deduct my wage?

    Also, what if I provide more than regular services to 2 out of my 7 properties, can I be considered as a business or just business income for 2 of the properties and rental income from the others?

  136. 142. Doby

    Hi, I have a suite I rent out in my home. I have been claiming the income on my tax return along with the appropriate expenses.

    Last year I had to replace a leaky roof & gutters and furnace. Can I claim these? I live in BC.

  137. 143. Ed Rempel

    Hi Doby,

    No, you can’t claim them – at least not without major consequences.

    Maintenance costs for rental properties is for repairs only, not improvements. Replacing a roof, gutters and furnace with new ones is an improvement. The cost would also be too large to be considered an expense of the year.

    Therefore, you would have to capitalize them and show them as an asset – not an expense.

    The problem is that if you claim depreciation on an asset that is part of your home, you risk losing your principal residence status. Claiming depreciation when the rental property is part of your home is not a good idea, unless the asset is not part of the home (such as a fridge or stove).

    I’m sure it seems unreasonable to you, doesn’t it, Doby? If you claimed them, it would probably be as much as your entire rent for the year.

    Ed

  138. 144. Ed Rempel

    Hi Bonnie,

    Do your questions sound reasonable to you? These types of questions can’t be definitively answered without knowing all the details, but the short answer is that they must be reasonable.

    We see this relatively often with rental property owners thinking they are big-time operations trying to claim all kinds of expenses or thinking they are a business, and using that to stretch every possible expense far beyond reasonable.

    Claiming a wage for a spouse for minor jobs in only a couple of rentals would be difficult to be considered reasonable. Is the rent enough that it would be reasonable to pay someone to collect it? Remember also that if he pays you a wage, you must pay both employer and employee shares of CPP on it.

    What does “more than regular services” mean, Bonnie? I’ve been trying to think what exactly you might mean, but my mind keeps wandering into fantasies. :)

    Again, having a business that only involves collecting rent and some miscellaneous services for 2 rentals doesn’t seem like a real business. If your business has only one client who is your spouse, it can be seen as a sham.

    Any business needs to have a reasonable expectation of profit, so if you are not showing a profit or significant moves towards a profit by year 2 or 3, then entire business can be disallowed. CRA does monitor business to make sure they are not a sham.

    Have you discussed this with your accountant or your financial advisor? Instead of trying to claim extreme expenses, there may be some planning opportunities. For example, if your husband is the higher income earner, why is he the owner of the properties and not you?

    If you are trying so hard to stretch expenses, is that because the properties are not very profitable or because you are paying too much tax on them?

    If the properties are not making making much money, perhaps you should consider whether they are profitable enough to keep. Most of the people we have seen with rental properties have negative cash flow.

    If the properties cost too much tax, that is common once the mortgage is paid down. That is why it is often best to never pay much down on your mortgage. Some planning may be necessary. For example, using your equity to invest in tax efficient investments, such as tax efficient mutual funds, can provide tax deductions to offset the highly-taxed rent income.

    We have some clients with multiple rentals doing the Smith Manoeuvre on all their rentals. This has some significant benefits, such as providing some useful tax deductions and higher growth potential, and can be a good diversification.

    I’ve been around long enough to see a lot of real estate millionaires go bankrupt. Real estate usually makes a low return unless there are large mortgages. In the early 90s when real estate values fell over 30% and rents dropped similarly, many real estate millionaires with multiple properties found themselves over-leveraged and lost everything. They were also not diversified and did not have much in other assets that could have sustained them, since the stock and bond markets made decent returns while real estate values plummeted.

    I’m reading between the lines that there are deeper issues here. Without knowing what your issues are, I hope one or the other comment is helpful.

    Ed

  139. 145. Keith

    Hi there I have a question on the Mortgage Interest as a tax right off? I have a deal where I am paying Interest only on my rental unit not a bank both another investor?

    Can the total I pay each month be written off at tax time?

    Thanks

  140. 146. Erick

    In a situation where a partnership is trying to set aside funds for anticipated expenses, is there a way of structuring those funds so as to defer taxes? For example, I have a multi-unit rental property in partnership with several other people. A portion of the rent each month is set aside, up to a pre-defined total amount, into a fund that will be used for future anticipated maintenance. Is there a way to structure this fund so that the money avoids tax treatment until such time as it is used – either for property maintenance (would be counted as offsetting income and expense amounts) or distributed to the partners as income (and taxed at the partners’ marginal tax rate)? The goal is to avoid paying corporate/business tax on any income and flow through all income to the partners to be taxed at their marginal rate.

  141. 147. M Brooks

    I rented a property for 5 months but then lost my tenant. I put the property up for sale and could not sell it. The bank forelcosed on the property. How do I report this on my taxes???

  142. 148. Ed Rempel

    Hi M Brooks,

    You have a combination of a rental loss and a capital loss. You only used the property as a rental property, so you can subtract the operating expenses from the rent to get a rental loss to claim on your personal return.

    Then you can claim a capital loss based on the difference between the total cost to buy and the net proceeds of sale. In both cases, include all buying and selling costs.

    For these kinds of transactions, you should probably use an accountant. The issues can involve some judgment and there are significant dollar values.

    Ed

  143. 149. John

    I am trying to understand correctly on FT first point (reply 38) regarding shift the rental income to lower income.

    My spouse is staying home parent (no income) and we have a rental property, it still currently under my name only. I’m trying to minimize paying tax or perhaps getting a bit refund by adding her into property title

    Current situation:
    Assumptions:
    Say salary income 50K/year
    Spouse income 0
    Property income 10K
    Property expense 5K
    Net Property income 5K

    So my taxable income is on 55K

    Plan
    Add my spouse to the rental property title (say 1% ownership due to additional property transfer tax that we have to pay by adding a person)
    Say we use the same assumptions as above, with the following exceptions:
    1. Put all rental income under my spouse $9999 and $1 for me
    2. Put all rental expenses $5000 under me (higher tax bracket)

    So does it mean that
    my taxable income would be $45K and my spouse is $9999 ?

    Thanks, John

  144. 150. MW

    Thanks for such an informative site. I have a question about basement waterproofing and whether it would count as a repair.

    We purchased a duplex in 2012 with intention of renting out the separate basement suite. We paid 14,000 to repair cracks in the foundation and waterproof the outside of the home. Part of this involved installing a new sump pump. We could not have rented the basement without these repairs as water would have continued to come inside.

    Would this cost count as a repair? Thanks.

  145. 151. Derek

    Im not sure if this is even a active discussion any more but ill post this and see

    We bought a house a few years ago, and last year we paid 20K to have somebody build a suite downstairs…PLUMBING ELECTRICAL flooring finishing ect.
    Now do we put this as a repair/maintenance thing,
    Do we put this as a CCA expense?
    Do we not deduct this as it might affect us selling in the future with our
    primary residence would be subject to other taxes.

  146. 152. FrugalTrader

    @Derek, I think the conventional wisdom is to not claim the CCA as it is your principal residence. However, I suggest that you contact a qualified accountant for advice.

  147. 153. Danielle

    Derek, FT is correct – you can’t claim CCA on a principal residence. However in this case you could make a case for capitalizing it since it used to earn income. It’s definitely not expensed. Your best bet is to do nothing with the $20k and just claim the related income and expenses in the future. CCA is a nasty beast that can come back to but you in the butt in the future if you were to sell

  148. 154. al

    can i deduct the full monthly condo fees ?

  149. 155. FrugalTrader

    @al, as long as the condo is an investment property that you rent out, then I believe that you can deduct the condo expenses.

  150. 156. Mark

    just bought a new furnace for a rental property…what class of CCA would this fall under?

  151. 157. Jel

    I didn’t claim CCA the first year when I bought a rental house 6 years ago. I’d like to claim it now, how do I determine the value of the building and the current CCA now?

  152. 158. Marcin

    I have a house that I have been renting for a while which has more deductions than income. I have also recently rented out my condo which has more income than expenses. I wanted to know if the interest from the house mortgage can be applied to the condo income . Basically, are all income and expenses applied in total, or to a particular property?

  153. 159. Mr. Bowen

    In my case, $2000 was added to taxable income for the year. At the 40% tax bracket, I would pay $800 in taxes for the year.

  154. 160. Christina

    How would one claim their own time spent on maintenance/repairs?

    My husband is quite handy and has fixed things like a broken AC, fridge, etc. We also clean the house between tenants, groom the yard, repaired some dented walls, etc.

    We spend many hours doing these things, and I can’t seem to find documentation on how to claim this time. if we paid someone to do it, we would be able to claim it then, so not sure how to go about doing it if it is our own time.

    TIA!

  155. 161. Alpha Centauri

    Christina,

    Technically, you cannot claim your own labour on repairs. This is why, generally for a rental property, I’ll hire someone to do the work, unless it’s a very simple task. It sounds like a raw deal, but it’s set up this way precisely because there is no paperwork. Alternatively, you could “hire” your husband and pay him a wage for his work. But then, that would have to be declared as income for him.

    You’ll have to weigh the ability to write off an expense, with your husband’s time. Labour’s expensive, so it sounds like if your husband’s handy with work, you may benefit just carrying on what you’re doing. Then, if your husband’s too busy, that’s when you can hire outside help.

    Good luck!

  156. 162. Christina

    Thanks for the reply Alpha!

    I figured as much but wasn’t sure if there was a way to claim the time/work.

    Oh well.

    Cheers!

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