Basics, Credits & Deductions, Rental Income

Can Rental Expenses from a Previous Year be Deducted?

I purchased a new home two years ago and renovated it to turn it into a rental property. This year after all the renovations were done, I decided to rent it out. Can I claim the expenses on this year’s tax return?

No, rental “expenses” must be deducted in the year they are incurred, so you can’t claim the renovation expenses from previous years on your current year’s income tax return.

Can these expenses be claimed as Capital Expenses?

Yes. If the renovations were significant and improved the value of the property, you can add the cost of the renovations to the cost of the property and claim them in the year you started renting it out. You can then claim Capital Cost Allowance (CCA) (or depreciation) on the total value as the Adjusted Cost Base (ACB) of the building. For example;

  • You purchase a fixer-upper property for $300,000 with the intention of renting it out. The property assessment shows the building as being worth $200,000 and the land at $100,000.
  • You then spend $80,000 in renovations to improve the building itself. Your Adjusted Cost Base (ACB) of the building is now $280,000. This will be the figure you enter as an “addition” to Class 1 – 4% in the Calculation Of Capital Cost Allowance section of the T776 – Statement of Real Estate Rentals.

You will then claim depreciation of the building over the years instead of deducting the whole amount as an expense in one year. For more information on the type of expense, see this TurboTax article: Rental Property Expenses: Current or Capital.

Can I report a negative amount for the rental income?

Yes, if you are deducting current year expenses from your gross rental income and the expenses exceed the income, you will incur a rental loss.

In the first year of your rental operation, you cannot claim the renovation expenses if you were not receiving income yet. You can however claim “soft costs” as expenses prior to the property being available for use and earning income. If you are claiming the renovation costs as Capital Expenses, you add them to the ACB of the building and include the total as a Class 1 CCA addition. You cannot create or increase a loss from your rental income by claiming CCA.

Your net rental income will be a negative value on Line 12600 – Net Rental Income representing a rental loss. This negative amount will be deducted from your other sources of income. However, the amount on Line 23600 – Net Income cannot be a negative value.

Is it better to claim the renovations on a newly purchased house as expenses or as CCA?

It depends. Some renovations can be claimed as current expenses and others that have a long lasting value have to be claimed as capital expenses (claim the CCA). However, for a newly purchased home that has not been used to earn rental income yet, you must claim the renovations as capital expenses.

Depending on your tax situation, if you have income from other sources, claiming the renovations as current expenses can reduce your taxable income immediately. But if you don’t have any other sources of income, you will not be able to benefit from claiming current expenses since your net income on line 23600 cannot be a negative value. In this case, it is better to claim the CCA value of the renovations over the years.

I am renting my property to my relative and charging the cost of maintaining the property. Do I claim the rental income? How do I claim the expenses?

No. If you do not intend to actually make a profit charging rent to your relative, you may not have to include it as rental income. The question to ask yourself, in this case, is: Would you be charging the same amount of rent if it was to a complete stranger? If the answer is no, that you’d be charging more, then you aren’t really out to earn a profit. Of course, if you aren’t claiming the rental income, you cannot claim any expenses either.

For more information on how to report rental income, visit this TurboTax link.

TurboTax Premier offers an easy step-by-step guide on how to report your rental income and expenses. Consider TurboTax Live Assist & Review if you need further guidance, and get unlimited help and advice as you do your taxes, plus a final review before you file. Or, choose TurboTax Live Full Service* and have one of our tax experts do your return from start to finish.

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