Managing a Rental Property and Taxes: What You Need to Know

Whether you’re a seasoned real estate investor with multiple properties or just dipping your toes in the market by renting out a portion of your home, managing a rental property can be a lucrative investment. However, it also entails the responsibilities of being a landlord. In addition to managing leases, tenants, and other logistical details, you must also ensure compliance with federal tax regulations, specifically the Canada Revenue Agency (CRA). To help you navigate this aspect, we have addressed some common questions regarding how rental properties impact your tax obligations.

Rental Income Reporting and Expense Claims: What You Need to Know

If you have rental income that needs to be reported, there are various expenses you can claim to help minimize your tax obligations. Here are some key points to consider:

For a Single Rental Property: If you have just one rental property, you can claim vehicle expenses incurred for transporting tools and materials to the property for repairs.

For Multiple Rental Properties: If you own multiple rental properties, you can also claim vehicle expenses for tasks such as rent collection, supervising repairs, and property management. However, it’s important to ensure that these expenses are reasonable. Please note that airfare expenses for checking properties in another province are generally not allowed.

Expenses Eligible for Claiming: You can claim a range of expenses related to your rental property, including mortgage interest, property taxes, insurance, utilities, and condo fees. It’s worth noting that you can claim these expenses even if your property is vacant and available for rent.

Shared Space Expenses: If you rent out a room within your own home, you can claim expenses associated with shared spaces like the kitchen or bathroom. In cases where your tenant has equal use of these shared areas, you can typically claim 50% of the related expenses.

Remember to keep detailed records of your expenses and consult with a tax professional or the Canada Revenue Agency (CRA) for specific guidance on eligible deductions and claimable amounts.

Renting a Room to a Relative? Here’s What to Report

If you’re renting a room in your home to a relative at a rate that is below Fair Market Value (FMV), it is not considered income and you are not required to report it on your tax return. However, it’s important to note that if you reside in a province with a rent credit program, your relative who is paying rent may not be eligible to claim the credit.

On the other hand, if you charge your relative FMV rent, you will need to complete a T776 Form – Statement of Real Estate Rentals to report the rental income and associated expenses. This form ensures proper reporting of your rental income and allows you to claim any eligible expenses.

It’s always recommended to consult with a tax professional or refer to the guidelines provided by the Canada Revenue Agency (CRA) to ensure compliance with the specific regulations and requirements of your province.

Also read: Understanding the Basics of Corporate Tax Returns

Can I Claim Expenses for Property Repairs and Improvements?

If you have incurred expenses on repairs or improvements for your rental property, here’s what you need to know about claiming them:

Capital Expenditures for Pre-Rental Repairs or Renovations: If you made repairs or renovations to your rental unit before renting it out, the costs associated with these activities are considered capital expenditures. As such, they cannot be claimed as current expenses. Instead, these costs are added to the overall cost of the building, which can help reduce your capital gain when you sell the property in the future. The same treatment applies to any capital improvements you make to the property after it has been rented out.

Claiming Simple Repair Expenses: However, if you need to make simple repairs that do not qualify as significant improvements to the property, you can claim these costs as current expenses. Simple repairs are considered regular maintenance activities that help maintain the property’s functionality and do not result in a substantial enhancement or improvement.

It’s important to keep detailed records of the expenses incurred for both repairs and improvements, as well as any supporting documentation, such as invoices and receipts.

For specific guidance on claiming expenses related to your rental property, it is advisable to consult with a tax professional or refer to the guidelines provided by the Canada Revenue Agency (CRA).

Reporting Rental Property Income and Capital Gains: A Guide

Reporting Rental Suite in Your Home:

If you have a rental suite within your principal residence, it’s important to understand how to report it for tax purposes. When you eventually sell your home, capital gains will apply to the portion of the house that is rented out. Let’s assume the basement apartment occupies 20% of the total square footage of your home. In this case, you would calculate the capital gain based on 20% of the home’s value at the time of sale. It’s crucial to note that utilizing space in your principal residence for rental income results in losing the principal residence exemption for that specific part of the property. However, if the rooms being rented out are not a separate self-contained unit and you do not claim capital cost allowance, you would still retain the exemption.

Also read: Tax Credits Unveiled: Leveraging Incentives in Corporate Tax Returns

Selling Your Rental Property:

If you’re planning to sell or managing a rental property this year, reporting the capital gain or loss on your tax return is necessary. To calculate the capital gains, subtract the selling price from the purchase price, including capital expenses and selling costs. The amount of tax you owe will depend on your total gain and your income for the year. It’s important to remember that only 50% of the capital gains are subject to taxation.

Efficient Rental Income Reporting:

Managing a rental property is an excellent way to generate extra income. To make the reporting process smoother during tax time, it’s advisable to keep meticulous records of your expenses and income from the property. This includes tracking the amounts spent and earned, allowing for easier reporting of your rental income.

As always, it’s recommended to consult with a tax professional or refer to the guidelines provided by the Canada Revenue Agency (CRA) for specific advice and assistance regarding the reporting of rental property income and capital gains.