Tax Deductions on Rental Properties
Landlords can earn a significant income from rental properties. However, the job also entails many responsibilities and expenses, such as secure insurances, and pay property taxes as well. The Canada Revenue Agency has allowed several deductible expenses that are generally associated with the rental business. It can significantly help landlords in managing their personal tax situations. This article will take you through some tax deductions that are eligible for rental properties that every landlord should know.
You can deduct property taxes that have been paid in the current year and claim the tax that is related to the rental portion of the property. If the property is located in a province with rental licensing requirements, then landlords can also deduct any associated vacation rental license fees. Moreover, for short-term rentals, occupancy taxes may be charged, which are also deductible.
Loan Interest Payments
Most owners use a mortgage to afford the rental property. Hence, one of their biggest expenses becomes the interest that they have to pay on their mortgage loan. It is perhaps the largest deductible expense for landlords. However, the section of the mortgage payment that is included to pay back the principal loan amount cannot be deducted. Only the interest payment portion is deductible.
Additionally, homeowners can also deduct the origination fees charged while purchasing or refinancing their rental properties. Similarly, the interest payments on loans taken for home improvements like renovations or any purchases related to the rental property are also deductible.
Any fees related to the mortgage payments like the application, appraisal and legal fees paid to real estate attorneys can also be reclaimed on tax returns.
All forms of insurance associated with rental properties are considered to be a necessary expense and are deductible. These deductibles are applicable to basic home insurance, special peril, and liability insurances as well. Landlords who have employees can also claim returns on the cost of their workers’ health and compensation insurances too. Insurance premiums are usually expensive for rental properties, and these deductions help offset that.
As time passes, all rental properties are subject to wear and tear. Their depreciation can lower the value of the property and rental payments. Luckily, such depreciation is also tax-deductible. Landlords can claim depreciation as soon as they list their house for rent, even if they have no tenants yet. The claim is based on the expected life of the rental property and must be spread over several years.
Similarly, the value of any equipment that is used to run the rental business, such as computers or vehicles, etc. can also be claimed. Furthermore, any construction done to add value to the property or make it more adaptable can qualify as a deductible expense. For example, adding a new roof, furniture, or household appliances. However, they are only eligible for deductions if they are valuable to the rental property for more than a year and can depreciate over time.
Some landlords handle the utilities themselves for their tenants. They cover electric, water, and gas bills, which are also tax-deductible. Internet, cable, or satellite expenses can also be added to these utility expenses. Even if the tenants reimburse on these utilities, landlords can keep filing these expenses and claim reimbursement on them.
Repair and Maintenance
Most of the home improvement expenses are deductible due to depreciation. However, certain additional repair and maintenance expenses can also be deducted separately. The key difference between them is that these expenses do not significantly contribute to the value of the rental property. Still, they are necessary to maintain the rentable condition of the property. Some examples of these expenses include painting, plumbing, HVAC filtration, pest extermination, and landscaping, etc.
Additionally, when homeowners hire people to do these repairs, labour costs are also incorporated. Any fees associated with tools and equipment are also liable to be deducted.
Most landlords also invest in advertisements for their properties to attract more tenants. They may use newspaper ads, websites, or real estate publications to list their property, which incurs some additional costs. These advertising expenses can also be tax-deductible. The full amount of such expenses can be claimed because it directly relates to the rental property.
It is important to consult with a real estate and financial advisor to help manage the tax deductions of your rental properties.