What to do about write-offs, taxes, selling a rental property and major renovations.
Owning a rental property can be a great long-term investment, but it can also be a headache around tax time. Here’s what you need to know as you get ready to tax plan for the year.
Be prepared to owe rental property tax
So many people with rental properties are surprised when they find out they owe rental property tax, even though they lost money every month. Since the Alberta economy crashed, residential rents have been decreasing, yet property taxes and interest rates have risen, leaving many landlords in cashflow negative situations.
So why will you owe tax on a cashflow negative rental? The mortgage payment.
Your mortgage payment is made up of interest and principal. Interest is a tax deduction, but the principal portion is not. The split can be found on your annual mortgage statement.
The principal portion is usually about half of your mortgage payment, which makes up the bulk of your rental property expense. So even though you might lose a few hundred bucks a month on a cashflow basis, you are actually paying your mortgage down, and improving your net worth.
Rental property deductions
Here is what you can deduct from your rental income:
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Interest portion of the mortgage payment
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Property tax
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Insurance
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Condo fees or management fees
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Utilities, phone, internet, cable
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Depreciation or Capital Cost Allowance (CCA)
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Repairs and small renovations
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Lawn care, snow removal, and cleaning
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Advertising
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Bank fees
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Unpaid rent
- Vehicle expense in certain circumstances (see below)
.Things you can’t deduct:
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Principal portion of the mortgage
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Capital improvements
Capital improvements
Larger renovation projects that improve the useful life of the property, or increase the value of the property, must be capitalized. Capitalized items are depreciated over a number of years, usually the estimated useful life of that asset. These are things like new windows, kitchen or bathroom renos, or a new garage.
There is a bit of a grey area when it comes to a new furnace, roof or window; in some cases these can be expensed, and in some cases they need to be capitalized. Chat with us if you have a major expense like one of these.
Renovations that are always a deduction are paint, landscaping, hot water tanks and replacing anything relatively minor that is broken. Again, if something major breaks and needs to be replaced, let’s chat about it.
Don’t double dip
This probably doesn’t need to be said, but only deduct expenses you actually paid for. If the tenant or some other party paid the expense, it’s not a deduction to you. In the case of a CRA audit, you will need to have the receipt or invoice as well as proof of payment.
Should I split the rental income 50-50 with my spouse?
This could definitely be beneficial from an income splitting tactic if they are on title or if they have beneficial ownership. They must also agree to take and claim that income.
If you have other partners in the property, you should each claim your percentage of the income and expenses.
Claiming vehicle expenses
If you have one property, you can only write off vehicle expense for doing repairs and maintenance, but not for collecting rent. If you have two or more properties, they also let you write off rent collection and property management. It doesn’t matter if your rental property is in the same city or not.
This CRA article explains what you can and cannot write off for vehicle expenses.
Preparing rental income and expenses for your accountant
We have a template available with the line items for all the expenses, so you can fill out all your own expenses, rather than have to gather every Enmax and Shaw bill for the year.
Selling a rental property
When you sell a rental property, you will create taxable capital gains or losses. The capital gain or loss is the difference between the selling price (less costs to sell) and purchase price. If the property was ever your principal residence, only a portion of the capital gain would be taxable.