The decision to become a landlord isn’t one to be taken lightly. While investments like stocks and bonds are often referred to as passive, a rental property is considered an active investment. If you rent out a suite in your house, you have to be willing to get up at 3 a.m. to repair a tenant’s leaky pipe, or hire someone else to do it. If you rent out your principal residence while temporarily living somewhere else, you’ll need to consider hiring a property manager. Here are some tax tips to help make your journey as a landlord a whole lot easier.
Tax Deductions You Can Claim
One of the benefits of being a landlord is that you can claim tax deductions against your rental property. The Canada Revenue Agency has a laundry list of expenses you can claim. The more expenses you claim, the more you can reduce your taxes payable. While you can deduct some expenses in full like advertising, other expenses are deducted based on the percentage of your home rented out. Common expenses you can deduct on your rental property include heat, hydro, water and home insurance.
Unlike U.S. citizens, Canadians can’t normally deduct mortgage interest paid on their principal residence. The only exception is when you rent out part of your home. So if you have a mortgage, you can claim a portion of the interest as a tax deduction. For example, if you rent out 40 percent of your home, you can claim a tax deduction for 40 percent of your mortgage interest you paid in the year.
Designating Your Principal Residence
Before you decide to rent your home, it’s important to consider the tax implications which differ, depending depending on whether you rent out your principal residence or a standalone investment property. “When you sell your home, you’ll need to complete Form T2091(IND), Designation of a Property as a Principal Residence by an Individual (Other Than a Personal Trust), to select it as your principal residence,” says Brendan McCann, a chartered professional accountant at Kudlow & McCann in Toronto. “The CRA allows you to name one property as your principal residence per tax year for the years you owed it and were living there.”
If you rent out your house for part of the year, you can still name it as your principal residence as long as you were living there for some time during the year. Although you can only designate one property as your principal residence per tax year, you don’t have to name the same home each year. If you rented out your house for part of the year, you can name it as your principal residence when you move back in. Just keep in mind you’ll have to pay capital gains when you sell your home for the period of time when it wasn’t your principal residence.
Claiming Capital Cost Allowance
By renting your house, you have the ability to amortize the house at 4 percent per year. This is an opportunity for you to reduce your rental income and pay less tax. The downside is that if your house has appreciated in value when it is sold, there will be a recapture of the full amount of amortization already claimed plus capital gains on the difference between the selling price and the original purchase price. This could lead to a large tax owing. When you rent your principal residence, you have the choice of claiming capital cost allowance. By not claiming CCA on your home, you won’t receive tax deductions for capital (long-lasting) expenses while you live there or when you’re renting out your home temporarily, but you won’t have a big tax bill from a recapture when you decide to sell.
Stay Organized With Recordkeeping
When you’re a landlord, it’s important to keep good records. Not only will you want to keep records of the rent you receive, you’ll also want to claim any expenses you incur on your rental property. Landlords, along with self-employed individuals, are more likely to be audited than salaried employees, according to the CRA. It’s important to have all your receipts for expenses, otherwise your tax deductions could be disallowed and you could face costly penalties and interest.
References & Resources
- Canada Revenue Agency: Expenses You Can Deduct
- Canada Revenue Agency: Rental Income Line 126 – Net Line 160 – Gross
- Brendan McCann, chartered professional accountant; Kudlow & McCann CPA; Toronto, Ontario
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