Exploring tax considerations for rental properties
Are you looking to purchase residential or commercial property for the purpose of renting it out? If so, there are certain tax considerations to consider. In this article, we’ll focus on expenses and what can be claimed for rental income.
Expenses must be reasonable to be claimed for tax purposes. Expenses are typically divided into two categories: capital expenses and current expenses. Let’s examine some important details about each.
Capital expenses vs. current expenses
Capital expenses are one-time expenditures, and should offer a lasting benefit to the market value of the original condition or value of the property—for example, running plumbing to the basement unit. Most costs incurred to sell the property, such as real estate commissions or the cost of improvements to make the property more marketable, are considered capital expenses. And they are deducted over a multi-year period.
Current expenses are often recurring by nature and provide a short-term benefit. Lawn care for instance is something that needs to be done regularly, so it’s considered a current expense. As is a payment for repairs to fix or restore a property so that it’ll be in the same condition as it was when you purchased it. Current expenses are generally deductible in the year they arise.
Here are a couple more examples to help you determine the difference:
Say you own a rental house with wooden siding and the paint on the siding has worn away. If you hire someone to paint the siding, it’ll likely be considered a current expense.
Suppose you then are concerned about having to repaint the siding again in a few years and instead decide to install vinyl siding. The installation cost would likely be a capital expense since it improved the house beyond its condition when you purchased it and it also provided a long-lasting benefit.
The difference between the two might sound like semantics, but it has very real tax implications.
Let’s take look at some of the different expenses that fall into each category.
Costs to purchase the property: The total purchase price includes the amount you pay for your property and sales taxes, as well as closing costs including legal fees, land transfer taxes, and fees paid to real estate agents.
Costs to improve the property: For instance, if you renovate a property so it attracts tenants, the renovation costs would be capital expenses.
Furniture and equipment: If you furnish your rental property or own equipment that you use to maintain the property, such as garden equipment, the cost of these items are also capital expenses.
Management fees: If you pay someone to manage your property, you can deduct those fees. You can also deduct fees paid to someone for finding you new tenants.
Repairs / maintenance: You can deduct expenses for repairing your rental property and maintaining it in proper condition. This includes salaries and benefits paid to a property’s superintendent. It also includes landscaping costs, but only those that relate to the year.
Utilities: You can deduct utility costs for the property, but only if the terms of the lease require you, as landlord, to cover such costs.
Lease cancellation costs: You can deduct the portion of a payment you make to cancel a lease relating to the current year.
Please note: This list isn’t comprehensive. If you’d like to learn more about what expenses you can and can’t deduct from your taxable income, or have any other related questions, it’s important to speak to tax and legal professionals.
This report is published by CIBC with information that is believed to be accurate at the time of publishing. CIBC and its subsidiaries and affiliates are not liable for any errors or omissions. This report is intended to provide general information and should not be construed as specific legal, lending, or tax advice. Individual circumstances and current events are critical to sound planning; anyone wishing to act on the information in this report should consult with their financial, tax and legal advisors.
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