Most people who have the means and desire to rent out a portion of their home or a second property have thought long and hard about the ramifications of becoming a landlord. It’s a big decision. An issue that may not be immediately obvious to consider is the impact that collecting rent every month will have on your taxes.
Real estate offers big advantages to those willing to invest. Rent payments will cover a portion or all of your mortgage payment and, in time, secure ownership of the home at virtually no cost to you. Most expenses of owning the property are tax deductible but some are not. It’s important to know the difference.
What is tax deductible?
As a rental property owner, certain expenses are fully tax deductible and others must be amortized over several years. The latter are referred to as capital expenses and the method with which they are deducted over time is called capital cost allowance (CCA).
Expenses like the cost of advertising the property, minor repairs, maintenance (i.e. painting supplies) and any legal expenses you may incur are fully tax deductible. If you rent out a portion of the home you live in, you can deduct certain expenses based on the amount of space the rental unit takes up in your home. These include home insurance premiums, utilities, the cost of outdoor maintenance (i.e. landscaping), the interest portion of your mortgage payment and property taxes. Your accountant can help you determine amounts.
The rent that is paid to you is considered taxable income. Any amount over and above the rental expenses that you have incurred must be claimed on your tax return as income.
When it comes to capital expenses, these are costs you incur that will provide a lasting benefit or advantage. They are costs that have been incurred to improve the condition of the property i.e. renovating the kitchen in your rental unit or replacing the windows. The cost of these expenses will have to be depreciated over a period of three to five years. This is something that your accountant will help you determine.
Becoming a landlord offers many challenges, but home ownership is a tangible asset that appreciates each year. If you can find a balance between effort and earning, as well as profit and taxes, real estate can secure a future for you in a ways few other investments can.