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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.

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FrugalTrader About the author: FrugalTrader is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.

{ 9 comments… add one }

  • Christina July 2, 2014, 10:49 am

    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.


  • candy January 13, 2015, 12:23 pm

    What happens if you hire someone to do snow removal but they want paid in cash. My understNding is that they are not going to claim it so neother can I right?

    • FrugalTrader FrugalTrader January 13, 2015, 6:11 pm

      @Candy, as far as I know, you will need receipts in order to claim it under your rental business.

  • Oilrental January 28, 2015, 5:30 pm

    There was a question “Mitch” asked above back in 2008 but I don’t see a response to it and I’m curious to the answer.

    “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?”


  • Mohan February 26, 2015, 10:25 am

    Iam new to this. I have rented my condo last year. I get appxly 1500 rent, i pay 1000 mortagage 690 condo maintenace fee, 2000 property taxes.
    How do i calculate net rental income ?

  • Dr. Philosophy February 27, 2015, 6:56 pm

    @ Mohan —
    Step 1: Find every shred of documentation you have.
    Step 2: Go to a tax preparer.

  • Dr. Philosophy February 27, 2015, 6:59 pm

    @ Oilrental —
    I suspect it would be considered income if the cash received is not equity. Getting a cash back mortgage is a way to make money. Just like rewards points are a form of income if they are ‘earned’ on business expenses.

  • Dr. Philosophy February 27, 2015, 7:03 pm

    @ Candy —
    It depends on what sense of ‘can’ you are working with. Of course you can in a sense write down whatever the heck you want on your tax return. No one will stop you.
    On the other hand, I suspect you mean “Will I be able to make a claim for expenses when I don’t have any shred of evidence that I paid, without bad consequences”. I think you can see pretty clearly that the answer to that is “no”.

  • Shaw October 8, 2015, 6:42 pm

    Hi, I’m a little confused on the “The percentage depends on how much space you have rented relative to the size of the building.” part.

    Let’s say you have a roommate who you rented one room to, but he also have access to the common areas – living room, kitchen, washroom; then do I only get to deduct mortgage relative to the size of that one single room vs the single room + half of the common area?

    The latter arrangement seems much more fair.

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