It’s that time of the year again. Time to gather up all of your documents related to your income and expenses so that you can file before April 30. The tax season has arrived.
Table of Contents - Real Estate Expenses You Can Deduct from Your Taxes
Fortunately, you can deduct any reasonable expenses that occurred as part of maintaining your rental property. Because your rental property is a source of income, it functions as your business. Just as you would be able to deduct expenses related to running your own business, you’ll be able to deduct expenses related to helping you generate income from your rental property.
There are two types of expenses you can incur on your rental property:
Current expenses are the everyday costs of maintaining your rental property. A current expense reoccurs after a short period and improves the property to its original condition. For example, a fresh coat of paint or cleaning the gutters are current expenses.
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A capital expense offers a lasting benefit or advantage. It improves the property beyond its original condition. This includes purchasing assets separate from the property itself, like buying a new and improved appliance. These are treated differently from current expenses on your tax return.
Below are some of the deductions related to your rental property that you can claim on your tax return.
Repairs and maintenance
You can only claim repairs that are current expenses, not capital expenses. You can deduct the cost of labour for current expenses, which include minor repairs and maintenance. However, you cannot deduct the cost of performing your labour.
While you cannot deduct the cost of capital expenses, you can claim capital cost allowance.
You can deduct your property taxes from your tax return, but only for the period, your property was available for rent. If it was unavailable for you to rent out for part of the year, you cannot claim your property taxes for that time.
If your lease agreement outlines that you are responsible for paying utilities for your rental space or units, you can deduct these costs. Utilities include water, gas, oil, electricity and cable.
You can deduct your insurance premiums on your rental property for the current year when filing your taxes. If your policy offers coverage for more than one year, you would claim the amount the covers the current tax year. You would then deduct the remaining amount of your premium in the appropriate year.
As described in the insurance example above, you can deduct prepaid expenses for the year in which you received the benefit. If you paid $3,000 for insurance on your rental property for three years of coverage in year one, you can claim $1,000 for each year of coverage as it relates to the current tax year. You are allowed to claim this deduction so long as you have not already claimed the amount in another tax year.
With the accrual method of accounting, you would claim the expense that you already prepaid in the years in which you received the benefit. With the cash method of accounting, you cannot deduct the prepaid amount relating to a tax year that is two or more years after the year the expense is paid. However, you can deduct the part of any amount you paid in a previous year for benefits received in the current tax year, assuming you didn’t already claim it.
If you incur costs related to travelling for your rental property, you can deduct these expenses. For example, if you frequently drive to the property as part of your landlord duties, you can deduct the cost of transportation. You may not deduct board and lodging, which are considered personal expenses.
There are some differences regarding which travel expenses you can claim depending on the number of properties you own. You can find out more on the Canadian Revenue Agency’s website.
Many people help you manage your real estate investing business – but their premium services come at a cost. Fortunately, you can deduct many of your expenses related to hiring professionals.
An excellent property manager doesn’t just save you time in handling your landlord duties but could also save you money on your taxes. If you outsource property management or other administration to a third party, you can deduct the cost of those fees.
You might also decide to outsource your bookkeeping or work with a financial professional to manage your records and prepare your taxes. Any fees that help you to better run your real estate investment business you should be able to claim.
If you need to pay an attorney to prepare a lease or to collect overdue rent, you can deduct the expense. However, legal fees incurred when buying your rental property cannot be deducted from your gross rental income. Instead, you would allocate the fees between the land and the building and add them to the respective cost.
Advertising is often a necessary expense for landlords looking to find new tenants. Whether you’re looking for one occupant for your single-family home or advertising for your multi-unit property, you can deduct any expenses related to advertising. This includes advertising in Canadian newspapers and on Canadian television and radio. You can also deduct expenses related to finder’s fees for agencies helping to place tenants.
Even if your real estate investment is a modest operation, chances are you’re still spending out of pocket for basic supplies that you need to manage your business. Whether it’s paper for printing brochures, pens for signing leases or stamps for mailing insurance documents, you can claim these items for deductions.
Even with small office items, you need to distinguish between current expenses and capital expenses. Paper, pens and stamps are everyday items that you purchase repeatedly. Your desk, computer and chair are capital items because they are assets that offer a lasting benefit. You can only claim your current office expenses, not capital expenses.
Being a landlord is a more costly endeavour than novice investors may realize. Fortunately, these deductions can help you offset the costs and get a bigger tax break, helping you grow your profits.
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