Although landlords buy rental property with the hope of turning a profit, sometimes things don’t always work out as planned. When your expenses exceed the income on your rental property, you may be able to claim a rental loss. Before you can claim the loss, you’ll need to determine whether it’s rental income or business income. Both are treated differently for tax filing purposes.
One of the most frustrating parts of being a landlord is tenants who don’t pay their rent on time. If you have rental losses from rent you are unable to collect after repeated attempts, you can deduct those losses from your gross rental income; this is done on Form T776, Statement of Real Estate Rentals. To be able to claim this deduction, your tenants must owe you rent at the end of the tax year, the rent must have been uncollected during the tax year, and you must include the rent in your income. Be sure to provide the CRA with proof you were unable to collect the rent, such as a notice to creditors or letters to your tenants asking for the rent.
Losses for Property Rented Below Fair Market Value
You cannot claim a rental loss if you are renting your property to family or friends below fair market value.
For example, if similar basement apartments are renting for $800 per month in your neighborhood, and you rent your apartment to your sister for $300 per month, you can’t claim a rental loss, although you won’t be required to report the rental income either.
Rental Income vs. Business Income
Before filing your tax return for your rental property, you need to figure out whether the income earned is considered rental income or business income.
- Rental income is revenue you’ve earned from a rental property where you are the owner or a property you have use of. Examples of rental income include rent earned from an apartment, condo, house, office space and room.
- Business income is revenue you’ve earned from a business activity you carry on to earn a profit. The examples provided for rental income can all be considered business income in certain situations.
When claiming a loss on rental property, business losses can be used to offset any income you earned in the current tax year, such as employment income. If you don’t have any losses in the current year, you can carry the losses back for up to three years and forward up to seven years.
Similar to business income, rental losses can be used to offset income earned from other sources. If your rental losses is more than your income from other sources, your loss is considered a non-capital loss and can be carried back or forward to reduce your tax bill in previous years.
Whether the rent you get from tenants is rental or business income depends on the number of services you provide to them. Additional services provided that can make your rental income be considered business income include providing meals, cleaning services and delivery services.
References & Resources
- Canada Revenue Agency: Rental Losses
- Canada Revenue Agency: Rental Income Line 126 – Net Line 160
- Brendan McCann, chartered professional accountant; Kudlow & McCann CPA; Toronto, Ontario
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