Your rental properties are some of the most valuable assets you’ll likely ever hold in your portfolio. You’ve taken the time and the care to investigate which one's are the best fit for you, which ones will hold their value the longest and which will give you the most bang for your buck.
Table of Contents - How to Claim Capital Improvements on Your Rental Property
- What are capital improvements?
- What are the criteria for capital improvements?
- Keep records for everything
- Work with a professional
- Rental Property Tax Deductions
When you consider capital improvements to these rental properties you want to make sure that you are going through the process with diligence and care. You might be considering several additions or improvements, such as a new electrical system that improves efficiency or new flooring that can reduce noise for all of your tenants.
Regardless of how you want to improve your rental properties, there are some things you should keep in mind from a tax perspective when looking into capital improvements. Claiming these expenses properly can be the difference of thousands of dollars come tax time.
What are capital improvements?
A capital improvement is any change or improvement to a property that will enhance its value, prolong its existence or make it suitable for a new use. These changes must be permanent; this is an important distinction to remember when considering what is and is not a capital improvement.
An example of a capital improvement could be putting up improved siding in a room that has a deteriorating exterior. You are prolonging the useful life of the structure by this action, so you would be able to claim it as a capital improvement that was done on your rental property.
Capital improvements can be done by anyone, ranging from cities and towns to businesses to individuals. When they’re completed by municipalities or businesses, they are also known as capital expenditures.
What are the criteria for capital improvements?
If you want to know whether the work on your property falls under capital improvements within the Canadian tax code, there are a few things that you need to consider. The Canadian tax code has many intricacies, so we recommend contacting a certified tax professional before beginning any renovations. These questions can help you think about where to start:
Does it provide a lasting benefit?
Your expense needs to give a lasting benefit or advantage if you want to claim it as a capital improvement. Temporarily “sprucing up” the place does not create enough sufficient value or benefit to be considered a capital improvement for tax purposes.
Does the expense maintain or improve the property?
A good rule of thumb is that improving your property beyond its original condition can most likely be called a capital expense. For example, replacing the wood siding with new sturdier vinyl siding on one of your rental properties would improve its current condition in the long-term.
Is the expense of a separate asset for a part of the property?
This is where things can get a little bit tricky. A separate asset is something that’s not part of the property – if you install a new, more efficient stove, that’s a separate asset and likely a capital improvement. If you just update an existing part of the infrastructure, like replacing the current pipes with pipes of the same type, that is likely not a capital expense because chances are you have not improved the property beyond its original condition.
Is the expense made to make a property usable?
If you buy a dilapidated property with the intent of renovating it into a suitable rental asset, odds are you’re in luck when it comes to tax time. Whipping a property back into shape will almost certainly count as capital improvements that will be fully advantageous come tax time.
There are many more scenarios to consider when deciding whether or not something is a capital improvement. The examples above are meant to serve as a starting point. Again, it’s recommended that you contact a tax professional to make sure you’re checking all the right boxes to claim capital improvements as tax benefits.
Keep records for everything
Another thing to keep in mind when undertaking capital improvements is that you should be meticulously recording everything. Many people assume that they’ll remember what they did at tax time. That could not be further from the truth. Memory is fallible, so it’s a good idea to keep records of all expenditures so that you can jog your memory about what you did when you did it and what the benefits were to your properties.
Additionally, you’ll need to have meticulous records if you want to claim tax deductions for your improvements. The Canadian Revenue Agency may ask you for proof of everything you claim, so you want to make sure that you have the hard evidence to back up your claims in case of an audit.
Work with a professional
If you want to take a capital cost allowance on your tax return, you should seek the advice of an accountant or tax professional – and likely both. There are ways to make sure that you’re maximizing the benefit of your annual tax scenario which might not be immediately apparent for a layperson. For example, if you’ll be holding a property for a while, then there could be capital gains taxes down the road to consider. There are several things like this to consider that professionals fully understand and appreciate, so don’t hesitate to seek their advice.
If your rental properties could use some improvements, you can rest assured that you can likely decrease your tax burden and offset these expenses. Capital improvements can serve you in several ways: they can make your properties more appealing to tenants, they can make you more committed to your holdings and they can help ensure that your tax situation is as advantageous as it can be. All of these factors add up to make it a desirable path for any property owner.