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Property Rental Expenses

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Personal Tax
Real Estate - Property Rental Deductible Expenses

Property Rental - Deductions 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 home.  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.  This form is used whether the property is in Canada or in another country.

Capital vs Expense

General rules regarding whether an item should be capitalized (capital expense) or can be expensed (current expense):

bullet When a cost is incurred to acquire a new asset, not as a replacement for a failed asset, and the asset is of an "enduring nature" (i.e., will not have to be regularly replaced), the cost is capitalized.
bulletIf a repair is incurred in order to resell the property, this is not deductible as an expense, and must be capitalized.  This is true even if this type of repair would normally be expensed.
bulletWhen a property has just been acquired, usually any costs incurred in order to get the property into usable condition would be capitalized.
bulletWhen a repair is incurred in order to acquire a new tenant this would normally be expensed, not capitalized.
bulletWhen a repair is required due to wear and tear, the cost is normally deductible as an expense.
bulletWhen fixtures such as toilets and sinks, i.e., things that become a part of the building once installed, are replaced due to normal wear and tear, this would normally be a deductible expense.  However, if these things are replaced in order to upgrade to something of better quality or performance, not because of wear and tear, this would normally be capitalized.

CRA indicates the following criteria should be used when determining if an expense is a capital expense or a current expense:

bulletDetermine if the expense provides a lasting benefit.
bulletIf it provides a lasting benefit, or extends the useful life of the property, it is capitalized.  Example:  putting vinyl siding on the exterior of a wooden or stucco house.
bulletIf the expense recurs after a short period of time, it is expensed.  Example:  painting the interior or exterior of a house.
bulletDetermine if the expense maintains the property, or improves the property.
bulletIf the property is repaired and improved to better than its original condition (when it was new), then the expense is capitalized.  Example: replacing wooden steps with concrete ones.
bulletIf the property is merely restored to its original condition, the cost is expensed in the current period.  Example:  replacing a worn-out roof with a roof of similar materials.
bulletDetermine if the expenses are for a part of the property, or are they separate from the property.
bulletFor replacement of assets that are separate from the building, the cost would normally be capitalized.  Examples:  refrigerators, stoves, compressors.
bulletWhen replacing an asset that is part of the building, the cost would normally be expensed.  Examples:  wiring, plumbing, hot water tanks.
bulletIf you cannot determine from the above whether the cost is a capital or current expense, consider the value of the expenses.
bulletIf they are of considerable value in relation to the value of the property, they are probably capital expenses.  However, if they are of considerable value because needed regular maintenance has not been done over a long period of time, the value would not necessary make these costs capital in nature.
bulletIf they are not of considerable value in relation to the value of the property, and are costs for ordinary maintenance, they are most likely current expenses.

Unfortunately, sometimes it is difficult to determine if a cost should be capitalized or expensed, but the above guidelines will hopefully help you.

Canada Revenue Agency (CRA) has a Rental 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 property rental.

Foreign Rental Property

If your rental property is in another country and the cost exceeds $100,000 Canadian, including the cost of any capital improvements made after the original purchase, then you must complete form T1135, Foreign Income Verification Statement.  There are penalties for not completing this form.

Other Resources

See all our articles related to Property Rentals.

 

Tax Tip:  Get professional accounting/tax advice to set up your accounting records for property rental, and keep complete and accurate records.

 

Revised: September 21, 2016

 

 

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