Any experienced real estate investor knows it isn’t easy to generate constant passive income from a rental property. There are several key operating expenses associated with owning a rental property, as well as property taxes and mortgage payments. All of these expenses make it challenging for even the savviest landlord to keep their head above water on an investment.
Thankfully, Revenue Canada allows for a number of strategic tax deductions for real estate investors! Through these deductions, investors can maximize the passive income they generate from their properties. But, to take advantage of them all, you’ll want to work with a licensed tax preparer or someone well-versed in how to handle and apply these deductions.
A brief disclaimer
Make sure you’re leveraging tax deductions correctly! Small mistakes could cause you to overpay—or worse, underpay—on your federal and provincial tax burden. While leveraging deductions can be tremendously advantageous to your investment strategy, exercise caution when claiming them.
Regularly consult with a trusted tax advisor to ensure you’re operating within the bounds of the law. And, whenever you’re preparing a tax return, be sure to have a licensed tax professional read through it before submitting it to Revenue Canada or your provincial tax office.
What to claim and what it means
Operating an investment property as a rental is expensive. Thankfully, you can claim many of these operating expenses as deductions on your federal taxes, improving your ability to generate a profit from your real estate investment.
In addition to your federal tax burden, you’re also responsible for paying local and provincial taxes on your property. While you’re able to claim these operating expenses on your federal return, you may not be able to claim them when filing your provincial taxes. Here are just some of the operating costs you can claim as deductions on your federal taxes:
•Advertising: Marketing your property to prospective tenants requires lots of effort and money. Thankfully, you can deduct certain amounts of your advertising budget from your federal tax burden. The amount can vary depending on a number of factors, so be sure to consult with a tax professional before claiming advertising expenses on your federal tax return.
•Interest: If you’re still paying down your mortgage on your investment property, you can actually deduct your interest payments from your federal tax burden. If you take out a loan to make capital improvements, this interest is also eligible for a federal deduction. In some provinces, you may be required to pay interest to tenants on the rental deposits they provide you prior to move-in. If this is the case, you can deduct this interest expense, as well.
•Insurance: Revenue Canada allows you to deduct the premiums you pay insuring your rental property. If you’ve paid for a policy that covers more than one year, you are only able to deduct the amount that covers the current tax year. You can deduct the remaining balance of the premium in the following years it applies to.
•Management fees: If you’re paying a property management firm to handle the administration of your rental property, you’re in luck: This is a tax-deductible expense! You can also deduct expenses paid to leasing agents that help you identify and qualify prospective tenants. If you hire an employee on your own to handle the property, you can also claim their salary as a deduction.
•Utilities: If you subdivide your building’s utility expenses and ask your tenants to cover their costs, you can’t claim utility expenses as a tax deduction. If, however, you cover the cost of gas, hydro, water or trash, as according to the terms of your lease agreement, you can deduct these expenses from your federal tax burden.
•Travel: Oftentimes, property investors find themselves traveling between real estate assets to collect rents, analyze damage, file paperwork or conduct repairs. If you’re spending time and money traveling to maintain your investment assets, you’ll be happy to learn you can claim travel expenses as a deduction from your federal taxes. You may also be eligible to deduct motor vehicle expenses, depending on the number of properties you own.
•Property taxes: Canadians are allowed to deduct property taxes from investment properties for the period of time their property was available for rent. Property taxes are levied by local governments, which means their relationship with your federal tax burden can become complex. Be sure to consult with a tax professional before claiming property tax expenses on your federal return.
•Professional fees: You’ll likely find yourself working with a lawyer quite frequently if you’re a property investor. You’ll need their help to acquire new properties, prepare lease agreements and collect late payments. Under the right circumstances, you can deduct legal fees from your federal tax burden.
Get to know the Capital Cost Allowance
The Capital Cost Allowance (CCA) is a tool that allows you to claim the depreciation of your property as a tax deduction. The CCA deduction follows a schedule, depending on the age of your asset and your investment structure. Be sure to talk with a tax professional about when to claim your CCA deduction, and the best way to leverage it to your advantage.
You can claim CCA for more than the cost of the building itself. For instance, any large pieces of equipment you use to maintain your building may also qualify for CCA credits, as do large appliances, like stoves and refrigerators. Improvements and additions made to your rental property may be claimed as a separate CCA deduction, as well.
Get familiar with the tax code
Learning how to leverage Canada’s tax code to your advantage can help you make the most of your real estate investment and ensure you’re reaping the best possible return. While it may seem challenging, with proper tax advice and professional assistance, you can make Canada’s tax code to work in your best interest as an investor. The deductions are out there—you just need to understand what they are and how to use them!