By: Fabio Campanella CPA, CA, CFP, CIM
One of the most confusing aspects of investing in real estate are the myriad of tax rules that have developed over the years. Understanding what can and can’t be deducted against your taxable rental income is as important as any other consideration when managing your rental properties. This article explains, in detail, 5 of the most common expenditures from a tax perspective:
1: Mortgage Interest:
For the most part, interest paid on mortgages used to originally purchase your rental property or additional re-financings to operate and/or improve your rental property are tax deductible. It’s very important to understand that ONLY the interest portion of your mortgage is tax-deductible, the principal repayment is NOT a tax deduction, rather it is repayment of debt.
2: Other Interest and Finance Charges:
Some fees that are charged when you get a mortgage to buy or improve a rental property are:
- mortgage applications, appraisals, processing, and insurance fees.
- mortgage guarantee fees.
- mortgage brokerage and finder’s fees.
- legal fees related to mortgage financing.
Deduct these fees over a period of 5 years; 20% of the fee year. It is important to note that these fees to setup your mortgage are not deductible immediately, they must be taken over a 5-year period.
3: Professional Fees:
Most professional fees (such as accounting or legal fees) that spring up when you buy a new rental property have to be included in the cost of the land and building. They can’t be deducted fully in the year you bought the building.
However, any professional fees that were necessary to help you run the rental operation are completely deductible. For instance:
- Legal fees for writing a lease agreement or collecting overdue rent.
- Accounting fees for bookkeeping, audits of your records, and preparing financial statements.
- As long as they help you run your rental operation, you could deduct fees for advice or help in preparing your income tax or other information returns.
4: Property Taxes:
You can deduct property taxes, assessed by a province or territory and by a Canadian municipality, that relate to your rental property for the period when it was available for rent.
In the first year of purchase, remember to scan the statement of adjustments as you could have reimbursed the seller’s portion of the property taxes that they pre-paid.
5: Capital Cost Allowance:
Also known as “CCA”. This is a tax amortization that you can elect to take to reduce net income on your properties and effectively defer taxes owing.
Note that any CCA taken in prior years will be added back to net rental income in the year that you sell the property. You end up deferring the tax until you have proceeds from the sale of the property to pay the taxes.
Staying on top of your taxes is just as important as any other aspect of managing your rental properties. At Campanella McDonald LLP we assist hundreds of clients with their rental property taxes. Feel free to contact us for more information.