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Tax

Optimize tax deductions from your rental properties with a good plan

Expense this, deduct that

Investing in real estate is a great addition to investment portfolios. Whether you hold property waiting for the value to increase, or utilize it for rental income, investing in real estate has been a popular choice for many. As tax season approaches, here is a look at how real estate investments that produce rental income play out on your tax return.

Like other forms of income, rental income must be reported. According to the CRA, rental income includes income from rooms, apartments, houses, space in an office building or other real and moveable property. There is a distinction made between whether rental income is from a property or a business, it is important to understand which category your rental income falls under as it will impact how the income is reported on your taxes. In this article, we will address rental income on property.

One of the benefits of having real estate investments is the ability to deduct expenses related to your real estate properties. As a property owner, you will become quickly familiar with expenses incurred. On an investment property, keeping receipts and invoices is important when in order to maximize the deductions. Allowable deductions include various expenses such as advertising, insurance, interest, bank charges, office expenses, professional fees, management and administrative fees, repairs and maintenance, salaries, property taxes, travel and utilities, lease cancellation fees and condo fees.

When it comes to motor vehicle expenses, deductions are allowed under the following conditions. These are different depending on if you own one rental property or multiple rental properties.

If you own one rental property, you may deduct reasonable motor vehicle expenses if you:

  • Receive income from only one rental property that is in the general area in which you live
  • You personally do all, or part, of the necessary repairs and maintenance on the property
  • You have motor vehicle expenses to transport tools and materials to the rental property

If you own multiple rental properties, you may claim the above PLUS:

  • Motor vehicle expenses to collect rent
  • Supervise repairs
  • Manage the properties

The key differentiator between the two is if only one rental property is owned, you cannot deduct motor vehicle expenses to collect rent where if you own multiple you can.

The list of things that you may not deduct includes land transfer taxes, mortgage principal, penalties, or the value of your labour.

Another consideration is capital cost allowance. Capital cost allowance is a deduction you can claim over several years for the cost of depreciable property. Depreciable property is anything where the value is reduced over time usually as a result of wearing out. Rather than deduct the whole expense in the year of purchase, the deduction for the cost of these items is spread out over several years. Capital cost allowance, including tax depreciation and capital expenses. However, you cannot use it to create a rental loss or increase a rental loss.

Purchasing property is a great way to add to, or diversify, your investment portfolio. Being able to capture rental income from that property offers several benefits when it comes to personal income tax. Be sure to keep all your receipts and sit down with your financial advisor or tax planner to ensure you are maximizing deductions and making the most of your investment.

For more information on rental income in Canada, see Rental Income – Canada.ca.


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