Landlord tax guide
Landlordship & Taxes
Renting a space in your home or buying a rental property is almost certainly a good financial move. Market (or building!) collapses not withstanding – and provided due diligence is taken – property has always been one of the safest and best investments…
As with most financial endeavors however, there are tax implications that must be considered when investing in and renting out property. Here is our landlord tax guide to (hopefully) ease your worries and help you make some key decisions.
Canadian house prices, in most areas, are rising. A proportionate rise in your property’s value means the greater the value now, the greater the monetary gains over time, but the bigger your mortgage, the greater the interest… A tenant in a basement apartment can mitigate that higher interest payment and help pay that mortgage off. Also, buying a second property as a rental can be a very good investment. However, being a landlord means you receive rental income – which is entirely “passive” income – something from which the Canada Revenue Agency like to gather a healthy lump of tax, so they will want you to report it…
This article is a rough piece of guidance, written to make you aware of the types of issues that are faced, tax-wise, when one chooses to rent property, or portions of a home. It is by no means a comprehensive document containing all – or even most – of what there is to know on the subject.
Within certain boundaries, home owners can be helped with the cost of home ownership by letting a part of their residence, without being classed as a landlord and having to pay the appropriate taxes; if you are renting a room to a relative for less than Fair Market Value (FMV), this is not considered income and you do not have to report it on your tax return. There is, however, in some cases a disadvantage to the live-in relative that can offset their monetary savings: If you live in a province with a rent credit, the relative paying rent will not be able to claim it (as they are not really ‘renting’).
Landlords charging FMV rent are not exempt, whether they are renting out a portion of their home or separate properties. They will therefore need to complete a T776 Form (Statement of Real Estate Rentals) to report rental income and expenses. The rules governing what can be claimed as expense and what can’t are quite complex – therefore if you are generating any income through property rental, it is always worth enlisting the services of a good accountant to make sure the reporting is accurate and that you are claiming back everything you legitimately can.
Here are just a few examples showing the complexity of these rules:
- If you have one rental property, you can only claim mileage to transport tools and materials to do repairs, but if you have multiple rental properties and travel to pick-up rent cheques, you can claim this mileage;
- Regarding travel expenses still – if your property is in another province, your airfare to check it out is not allowed;
- You can claim many expenses such as mortgage interest, property taxes, insurance, utilities and condo fees;
- If you are between tenants, you can claim utility expenses, but not when the property is rented; you can, however, claim repairs and maintenance to the unit once it has been rented.
The types of claimable costs above are considered current expenses. There are other things landlords may spend money on, which are considered capital expenditure. A capital expenditure is any work which is added to the cost of the building or unit – increasing its value perhaps; these costs reduce your capital gain when selling the property and therefore are deducted from your capital gains tax liability at that time, but cannot be claimed as a current expense (they are therefore part of your investment).
Repairs necessary prior to rental can be considered capital expenditure, but not ongoing repairs; major renovations, however, after commencement of letting, would be considered capital and not current.
A person’s principle residence is not subject to capital gains tax when sold. However, if a person’s principal residence contains a rental unit (being let for FMV), they will need to pay capital gains on the portion of the house being rented when they sell (i.e. if a basement apartment takes up 30% of the square footage of a home, 30% of the sale value will be taxable). However, the exemption is kept if the rented space does not constitute a separate unit and there is no claiming of capital cost allowance.
If a landlord is renting out a room in his or her home, they are restricted on the expenses that can be claimed for the shared space. What can be claimed is based on a number of variables such as the number of persons sharing the room – if there are three family members and one lodger, you could claim 25% of the expenses for the use of the shared portion of the home. So – now bear with me -the total percentage of eligible costs that can be claimed as expense, is therefore a combination of the percentage of the total square footage of the home that is used solely by the lodger, plus a proportionate amount of the percentage of total square footage considered shared/communal. Simple, right?!
Detailed information regarding what a landlord can and can’t claim is available through the CRA website. Renting out property IS a great financial move; as with many tax-related issues, however, a good, experienced, well trained and diligent professional can be invaluable not only in helping with reporting – but also in giving advice to ensure the rental strategy is best, to guarantee maximum return and tax efficiency.