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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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38 Comments, Comment or Ping
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.
Nov 28th, 2007 @ 12:11 pm
2. FrugalTrader
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.
Nov 28th, 2007 @ 12:22 pm
3. FourPillars
You should cover blog expenses (ie part of your internet costs) that you can write off.
Mike
Nov 28th, 2007 @ 12:30 pm
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
Nov 28th, 2007 @ 2:11 pm
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?
Nov 28th, 2007 @ 2:16 pm
6. MoneyMusing
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?
Nov 28th, 2007 @ 2:26 pm
7. FrugalTrader
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.
Nov 28th, 2007 @ 2:32 pm
8. FrugalTrader
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.
Nov 28th, 2007 @ 2:44 pm
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.
Nov 28th, 2007 @ 4:05 pm
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.
Nov 28th, 2007 @ 6:13 pm
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.
Nov 28th, 2007 @ 6:22 pm
12. Varun
There is a wealth of information here.
http://www.cra-arc.gc.ca/tax/individuals/topics/income-tax/return/completing/reporting-income/lines101-170/126/menu-e.html
Nov 29th, 2007 @ 5:42 am
13. MoneyMusing
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
Nov 29th, 2007 @ 12:51 pm
14. rick t
New to investment market!!…If I dont claim the deuctions do I have to claim the income ?? Why ?
Jan 14th, 2008 @ 2:31 pm
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.
Jan 14th, 2008 @ 2:35 pm
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 )
Feb 10th, 2008 @ 11:31 pm
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?
Mar 12th, 2008 @ 7:36 pm
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.
Mar 12th, 2008 @ 7:54 pm
21. moe
what is CCA??
Apr 9th, 2008 @ 1:44 pm
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!
Apr 14th, 2008 @ 5:53 pm
23. FrugalTrader
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.
Apr 14th, 2008 @ 7:04 pm
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
Apr 14th, 2008 @ 8:53 pm
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.
Apr 20th, 2008 @ 3:37 pm
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
Apr 20th, 2008 @ 3:54 pm
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
Apr 20th, 2008 @ 4:05 pm
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?
Apr 20th, 2008 @ 6:26 pm
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
Apr 20th, 2008 @ 7:02 pm
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.
Apr 28th, 2008 @ 4:52 pm
31. FrugalTrader
biff, if you are the renter, there aren’t any tax deductions that I know of in that scenario.
Apr 28th, 2008 @ 7:41 pm
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?
May 4th, 2008 @ 3:23 pm
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?
May 22nd, 2008 @ 4:39 pm
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?
Jul 28th, 2008 @ 4:11 am
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. : )
Aug 13th, 2008 @ 1:06 pm
36. FrugalTrader
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.
Aug 13th, 2008 @ 1:46 pm
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
Aug 20th, 2008 @ 5:09 am
38. FrugalTrader
In terms of income splitting:
Again, please contact a tax pro for specifics.
Aug 20th, 2008 @ 7:48 am
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