Tax Deductions 101: Rental Properties and Income
Wednesday Sep 27th, 2017Share
Someone asked me about what tax deductions exist for rental properties. I knew the basics, but as a property investor myself, it was time to find out just how much can be safely deducted without getting in trouble with the taxman. I’ve been on that side before with Canada Revenue Agency selecting me for a basic tax audit. It can be time-consuming, stressful, but in the end, not as bad as it seems. If there’s one piece of advice that you take away from this article, it’s to make sure you keep copies all of your documents.
Current Expenses & Capital Expenses
Current expenses refer to ongoing business expenses that are accounted for as they occur. It is one that generally reoccurs after a short period. For example, the cost of painting the exterior of a wooden property is a current expense.
Capital expenses generally give a lasting benefit or advantage. For example, the cost of putting vinyl siding on the exterior wall of a wooden home is considered a capital expense. Another would be building a deck in the backyard. Others include the purchase price of the rental property and any legal fees that were associated with the purchase.
Deductions on Rental Income
- Property insurance
- Advertising costs (eg. the fee to get the help of a Listing Agent to market the property)
- Lawyer fees
- Mortgage broker fees
- Office supplies
- Accounting fees (tax preparation, bookkeeping)
- The fees associated with the property management, including staffing and employment for services
- Repair costs
- Property taxes
- Utility fees, if paid, and maintenance fees for multi-residential condominiums
Motor Vehicle Expenses
You can deduct motor vehicle expenses if:
You own one rental property – You can deduct reasonable motor vehicle expenses if you meet all of the following conditions:
- you receive income from only one rental property that is in the general area where you live
- you personally do part or all of the necessary repairs and maintenance on the property, and
- you have motor vehicle expenses to transport tools and materials to the rental property
You cannot deduct motor vehicle expenses you incur to collect rents. These are personal expenses.
If you own two or more rental properties – In addition to the expenses listed above, you can deduct reasonable motor vehicle expenses you incur to do any of the following:
- collect rents
- supervise repairs; and
- generally manage the properties
This applies whether your rental properties are located in or outside the general area where you live. However, your rental properties have to be located in at least two different sites away from your principal residence.
You can deduct motor vehicle expenses only when they are reasonable and you have receipts. It is also recommended that you keep records of the kilometres travelled for your rental properties, tracking the total number of kilometres driven in that year. You must also be able to identify your total expenses paid for the vehicle during the year.
The interest paid to the bank from your mortgage payment is also tax-deductible due to the fact that it is related to a real estate investment. This is amazing because the taxes are usually a fairly large amount, sometimes even half of the mortgage payment for the first few years!