Year End Tax Tips - Rental Property Write-offs

If you own a rental property or if you are renting out one or more rooms in your home, a large number of your expenses can be deducted in calculating your net rental income. These expenses include utility costs, maintenance costs, property taxes, mortgage interest (but not principal), property management fees, and advertising fees.

You can use rental losses to reduce income from other sources. In cases where rental losses exceed income from other sources and cannot be deducted on the current year’s tax return, it becomes a non-capital loss that can be carried over to reduce taxable income in other years.

If you are only renting out a portion of your home then you are eligible to deduct only a portion of the costs, and if you are renting to a friend or relative at less than fair market value and this results in a loss, you will not be able to deduct it. Costs that are directly related to the rental portion of your home will be 100% deductible, while those costs that relate to the whole building (e.g. insurance and property taxes) are only partially deductible. Expenses can be split based on the number of rooms you are renting or based on the floor area, as long as the split is reasonable.

From TaxTips.ca:

Capital cost allowance (CCA) may be claimed based on the purchase price of the building, furniture and fixtures, etc., but not the land, and may not be used to create or increase a rental loss.  If you only rent a portion of your home, then you would only be able to claim a portion of the CCA, and this may result in the loss of the principal residence exemption when you eventually sell your home.  The claiming of capital cost allowance will probably result in a recapture of the CCA when the property is sold.  This will happen if the selling price of the building is greater than the remaining undepreciated capital cost (UCC) at the time of sale.  The difference between the original cost and the UCC will be added back to income.  If the selling price is greater than the original cost of the building, then the difference between the selling price and the original cost will be a capital gain.  When purchasing or selling a rental property, it is important to break down the purchase or sale price between buildings and land.  

A change in use of your home from personal residence to rental property, or from rental property to personal residence, can result in a deemed disposition for tax purposes.  This means that you will be considered to have sold your home and repurchased it immediately thereafter for fair market value.  There are many factors which affect this, and professional advice is recommended.

Net rental income or loss is reported on line 126 of your personal tax return.  This net income is included in "earned income" for purposes of calculating your allowable RRSP deduction limit for the following year.  The net income is calculated by completing form T776 Statement of Real Estate Rentals.  This form is used whether the property is in Canada or in another country.

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