All About Tax Deductions on Rental Properties

Many people choose to rent out part of their home or an entire property. This is a great way to pay off your mortgage and cover other expenses.

If you own a rental property, it’s a good idea to try and learn as much as you can about tax deductions. By understanding how tax deductions on rental properties work, you can ensure that you’re filing your taxes properly – and saving money. In this article we’ll go over some important information to know about tax deductions.

In Canada, rental income and expenses should be claimed on tax form T776. Income is the total rent you collect from your tenants over the year, while expenses can range from renovations, mortgage insurance, home insurance, and utilities. Basically, any expenses associated with the property’s upkeep.

There are two types of expenses when it comes to home ownership: current and Capital costs. Current costs refer to any expenses associated with upkeep or improvements that must be repeated – for instance, re-staining a deck every couple of years.

Alternately, a capital cost means an expense associated with a lasting improvement made to your home, such as an extension. The purchase of the home is also considered a capital cost. Basically, a capital cost is something that only happens once. Understanding the difference between capital and current costs will help you out greatly when filing your tax return.

You can also deduct mortgage interest on your tax return. However, you cannot deduct your mortgage principal. If you are unsure about mortgage tax deductions, speak to a mortgage professional to get an answer for your specific situation. Any refinancing or money used for home improvements, upgrades, and renovations can also be deducted.

Closing costs and other fees associated with your mortgage may also be deducted. These can include real estate lawyer fees, appraisal fees, and mortgage application fees. Again, speak to a mortgage professional for further information about how mortgage fees may be deducted.

Another big expense for landlords are utilities. Heat, hydro, water, and cable expenses may all be deducted on your tax return. If you also live in a unit within your rental property, you can claim the appropriate percentage of utility expenses. However, if you rent the whole property out and your principal residence is elsewhere, you can claim 100% of utilities.

Any property taxes paid to your municipality can also be deducted. As with utilities, the amount you deduct has to do with whether the rental property is also your personal residence, or if you rent out the entire property. Make sure to claim the appropriate percentage of property tax paid to make sure you’re filing your taxes correctly.

Like your mortgage interest, you can also deduct home insurance premiums. Sometimes home insurance covers a longer period of time, but you should only deduct the premium for that specific year from your tax return. Again, make sure to claim the correct percentage of the premium depending on whether you rent out the whole property or part of it.

Another cost often associated with rental properties is advertising. When looking for new tenants, you may place an ad online, in the newspaper, or even enlist the help of a real estate agent. You can always claim the full expense of advertising your rental property, even if you live there too since it’s associated only with the rental.

There is also a possibility of qualifying for the Capital Cost Allowance, or CCA. The Canada Revenue Agency determines the requirements for qualification, which include:

• Depreciable property

  Depreciable property refers to property or associated assets that have depreciated in value over the years. While many rental properties actually increase in value due to renovations or improvements, some properties that bear heavy use without improvement or upgrade may lose value over the years. If this is the case, you can write off the property’s capital cost including purchase price. However, this should be undertaken with caution and it would be best to speak to a mortgage professional or real estate lawyer before making a CCA claim.

• Class

  Any depreciable properties are split into classes. For example, a building acquired pre-1988 could be in class 3 or 6. Before making a CCA claim, ensure you know which class your building belongs in.

  CCA depends on the type of rental property you own, and when you purchased it. It’s calculated using a “declining balance method.” This means that the amount is determined by subtracting allowance claimed in prior years from the capital cost of the property.

  CCA can be hard to understand so it’s best to discuss it with a tax or mortgage professional.

Filing a tax return is a headache enough without added questions. While we’ve gone over some basics of rental property deductions here, it’s best to speak to a professional if you have any questions or concerns. They’ll be able to look at your specific situation and address your needs. You always want to be certain you’re filing your taxes correctly, and if you do, you can definitely save by deducting rental property expenses and income.