Property rental - What
expenses can be deducted from income?
If you rent out one or more rooms in your home, or if you own a rental
property, there are many expenses that can be deducted in calculating your net
rental income. These expenses include mortgage interest (but not
principal), property taxes, utility costs, house insurance, maintenance costs,
advertising, and property management fees. Rental
income and expenses can be recorded using the cash
basis of accounting, unless the property rental is considered business
income, in which case the accrual
basis of accounting must be used.. See Rentals
- Property or Business Income for more information.
Rental losses can generally
be used to reduce income from other sources. If the rental loss exceeds
income from other sources, and cannot be deducted on the current year tax
return, it becomes a non-capital
loss, which can be carried back or forward to reduce
taxable income in other years.
If you rent out only a
portion of your home, you would only be able to deduct a portion of the
costs. 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. Any costs which are directly related to the
rental portion of your home will be 100% deductible, and costs which relate to
the whole building, such as property taxes and insurance, would only be
partially deductible. The expenses can be split using floor area or the
number of rooms that you are renting, as long as the split is reasonable.
Capital cost allowance (CCA) may be claimed based on the purchase price of
the building, furniture and fixtures, etc., but not the land, and may not be used to create or increase a
rental loss. If you only rent a portion of your
home, then you would
only be able to claim a portion of the CCA, and this may result in the loss of
the principal residence exemption when you eventually sell your
The claiming of capital cost allowance will probably result in a recapture
of the CCA when the property is sold. This will happen if the selling
price of the building is greater than the remaining undepreciated capital cost
(UCC) at the time of sale. The difference between the original cost and
the UCC will be added back to income. If the selling price is greater
than the original cost of the building, then the difference between the
selling price and the original cost will be a capital gain. When
purchasing or selling a rental property, it is important to break down the
purchase or sale price between buildings and land.
A change in use of your home from personal residence to rental property, or
from rental property to personal residence, can
result in a deemed disposition for tax purposes. This
means that you will be considered to have sold your home and repurchased it
immediately thereafter for fair market value. There are many factors
which affect this, and professional advice is recommended.
Net rental income or loss is reported on line 126 of
your personal tax return. This net income is included in "earned
income" for purposes of calculating your allowable RRSP deduction limit
for the following year. The net income is calculated by completing form T776
Statement of Real Estate Rentals.
The capital cost of your
property is also recorded on form T776. The cost of the building is
recorded in the capital cost allowance schedule on this form. The cost
of land purchased during the year is recorded at the bottom of form T776 on
line 9923. When a rental property is purchased, the split of cost
between land and building should be agreed upon by the vendor and purchaser.
When a rental property is sold,
the amount that is the lower of cost or proceeds from the sale of the building
is entered in the capital cost allowance schedule on the T776. The
difference between this amount and the undepreciated capital cost will be
brought into income as recapture.
This amount will be nil if no capital cost allowance has ever been claimed for
the building. The proceeds from the sale of the land is entered on line
9924 of the T776. Any capital gain (proceeds less cost) is recorded on Schedule
Canada Revenue Agency (CRA) has a
Income Tax Guide (T4036) which goes into detail about deductible expenses,
capital cost allowance, deemed dispositions, splitting of expenses between
personal areas and rental areas, and most issues regarding
The information on this site is not intended to be a
substitute for professional advice. Each person's situation differs, and
a professional advisor can assist you in using the information on this web
site to your best advantage.
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