Our current real estate world is whacked. In our community, the median price for a single detached home is over $1 million. Owners, and want to be owners, are trying to find ways to making home ownership even an option. Owning a house is getting increasingly expensive, so many homeowners turn to income properties to offset the cost and potentially use it as a longer-term investment.
According to a recent poll, 15 percent of Canadian homeowners are already landlords and another 11 percent plan to earn rental income by renting out space in their primary residence or from a separate rental property. The survey also shows 37 percent of homeowners would choose a property with a source of rental income if buying a home today.
While there are many financial and legal issues to consider as a landlord, make sure that you don’t overlook tax considerations of earning rental income.
Income properties can be taxing
Owning an investment property is rife with unanticipated expenses, tenant issues and time-consuming administrative issues. Revenue from an investment property also means new tax and accounting requirements that may be unfamiliar and intimidating to some. Investors will want to know that they’re covered, no matter their situation when completing their tax return.
People ask about this all the time. What if I buy that condo or cottage, rent it out, what does it mean for my taxes, what can I write off, is it worth it?
The idea is to sacrifice a little now to generate passive income in their middle age and pre-retirement years and eventually have assets you can sell as you approach retirement.
Among the most significant expenses people will incur are upgrading rental properties to make them legally compliant for renting, including meeting fire and other code requirements. That included everything from enlarging basement windows on one property to installing sprinklers for mechanical rooms.
These types of upgrades fall under capital costs: expenses above and beyond normal maintenance, intended to improve the property, raise its value or extend its life but that may also depreciate over time.
The main criteria when determining if something is a capital expense is whether the expense will provide lasting benefit. Think of major building additions or the replacement of major building systems like roofs and wiring. Those costs also include the expense of buying the property and legal and other fees associated with the purchase. It could even include the furniture in a furnished apartment.
Because these costs are so high, property owners will face percentage limits on how much can be deducted annually which is where the situation starts to get complex. Instead, property owners can deduct their capital costs over several years under the capital cost allowance (CCA). Depending on what the capital item is, there are different rates.
Using an online tax solution that offers step by step guidance tailored to your unique situation can ensure you’re set up for success, and not making claims that aren’t applicable or leaving money on the table. Like TurboTax Assist Premier, which is designed specifically for people with complex tax situations, including investment income and rental properties, and want help from a real tax expert.
Using products like these can really help landlords learn what tax deductions and credits may be available to them, depending on their personal situation. If needed, they can also get help from a tax expert who will ensure they are recording their rental income and expenses properly.
Knowing what to claim
There are many misunderstandings about what can and can’t be deducted.
When claiming maintenance costs, a big one is the value of your own labour. People often think they can claim their own labour, but they can’t; you can’t deduct whatever value you place on your own time and labour. Another is property transfer fees, which can be a big expense when buying a property and aren’t deductible.
Similarly, some tenants provide services for landlords in lieu of rent. Think of lawn mowing or snow plowing. That knocks down the landlords’ taxable income, but the services themselves count as in-kind rent and the fair-market value is still taxable.
Still, there are plenty of deductions available such as insurance premiums, interest on loans used to pay for maintenance, legal fees, property taxes, utilities and necessary maintenance costs.
Landlords also need to decide whether their rental income will be treated as business or personal income. If you provide services to tenants such as security, meals, or cleaning, you’re providing a service-based business and will need to set up a business to handle the revenue. Otherwise, the rental income is simply taxed on top of other income sources, at your marginal rate.
Human side of being a landlord
The considerations aren’t all financial. Dealing with tenants can be a challenge.
Potential landlords need to take the time to find good tenants. Being a good landlord is also important, which includes responding quickly to issues, keeping rents reasonable and even going above and beyond to upgrade the property.
Tenant turnover is stressful, and you’ve got great tenants who are staying with you for the long term. While landlord life isn’t for everyone, those who understand what they’re getting into both financially and as a time commitment can see big benefits over the long term.
You’re buying yourself into a job. There’s nothing sexy about it; it’s not cool or fun. But it’s about setting ourselves up financially for a more stable future. And that’s a move in Keeping Life Current.