March 30, 2024
Renting a property is a great way to boost your savings or raise your monthly income. It does not matter if you have an apartment, condo, house, office space, or even you just have a room. But, it is important to grip on tax implications related issues. Landlords have to be smart about how a rental income is important to increase earnings, mitigate losses, and avoid any sudden tax-related issues when it comes to file.
In this blog, we are going to discuss the rental income and taxes for a Landlord and calculate the taxes on rental income expenses you can claim, and deduct. Let us get started:
Here are some key points to remember when it comes to the tax implications of being a landlord:
You can deduct expenses related to maintaining and preparing your property for renters. This helps reduce the taxable income from your rentals.
Some expenses like utilities and minor repairs can be fully deducted in the same year, while others like renovations that enhance the property’s value are depreciated over time.
If a tenant doesn’t pay rent by the end of the tax year, you can claim a loss by deducting the unpaid amount from your gross rental income. This applies whether the unpaid rent is included in your income or not.
Simply put, rental income refers to the money you make by renting out properties that you own or utilize. This could be income generated from renting out various types of spaces such as apartments, condos, houses, office spaces (or a portion thereof), or even just a single room within your own home.
Add up all the rent payments you receive, whether through cash, cheque, or electronic transfer.
Identify all eligible rental expenses outlined by the Canada Revenue Agency (CRA). The more expenses you can claim, the greater your potential tax savings.
This form helps you organize your rental income and expenses for tax purposes.
Don’t forget to keep thorough records of your expenses and store your receipts securely. If the CRA requests proof, having detailed documentation will support your claims.
Let’s consider an example: Start by multiplying the monthly rent by the number of months in the year to find your total rental income. Then, divide this amount by the current value of your property. For instance, if you charge $900 per month in rent and your property is valued at $100,000, your annual rental income would be $10,800.
Now, what about expenses? Can you subtract them from your rental income? Absolutely. Generally, you deduct these expenses in the same year you pay them.
As a side note, it’s worth mentioning that people typically allocate around 30% of their income towards rent.
When it comes to reducing your taxable rental income, knowing what expenses you can write off is crucial. But are all deductions the same? Here’s a breakdown:
These are your day-to-day costs like minor repairs, maintenance, and advertising that provide short-term value to your property. They can be fully deducted in the tax year they’re incurred.
Are there any long-term improvements to your property? Think of permanent additions or structural enhancements. While these aren’t immediately deductible, you can write them off over time through Capital Cost Allowance (CCA).
If you’ve paid for rental-related expenses in advance, like an annual home insurance premium, you can deduct them. Just remember, only the portion that applies to the rental period claimed on your taxes can be deducted.
Remember to subtract the interest you pay on loans used to purchase or enhance your rental property. Additionally, you can deduct the interest paid to tenants on their rental deposits.
Just ensure your vehicle expenses are reasonable, necessary, and backed up by receipts when claiming them as deductions.
Can you deduct the value of any work you do yourself? Unfortunately, the CRA doesn’t allow it.
If you’re living in the same property you’re renting out, can you deduct all expenses? Nope, only costs associated with the rented portion are deductible.
Are the taxes you paid when buying the property deductible? Not according to the CRA. They’re considered part of the property’s cost and factored into Capital Cost Allowance (CCA).
Can you deduct payments made towards the mortgage or loan for your rental property? Not the principal part, but you can write off the interest as an expense.
What about the penalties listed on your Notice of Assessment from the CRA? Unfortunately, those aren’t deductible either.
When it comes to taxes, the CRA distinguishes between rental income and business income. But what sets them apart?
To figure out if your rental income falls under ‘business income’ or ‘property income’, consider the services you offer:
Do you offer space in a home, apartment building, or office, along with essential amenities like electricity, parking, and laundry facilities? If so, you’re earning rental income. To report this, you’ll use Form T776: Statement of Real Estate Rentals.
Are you renting out a space or property where you provide extra services like meals, cleaning, or other products? If yes, then you’re generating business income. You’ll need to fill out Form T2125: Statement of Business or Professional Activities to report this income.
For landlords, knowing about rental income taxes is vital to making the most money and avoiding unnecessary costs. It’s important to keep track of deductible expenses, keep good records, and understand the difference between rental and business income. Remember to keep track of expenses diligently and utilize available deductions to optimize tax savings. For expert advice on accounting and tax matters, visit AquiferCFO to connect with an experienced accountant and tax expert.
