Tax Season is Here: What can you expense on your investment property?
Written by Marcelle & Neal Saulnier-Holland
As tax season rolls around, you might be scrambling to get all of your paperwork and documentation in order. If you recently purchased an investment property, or have plans to buy one before next tax season, we put together this list of “don’t forgets” to make sure you get the maximum return on your investment property.
Disclaimer: we’re Canadian and are writing this based on our understanding and use of the Canadian tax system. We can’t promise that all of the items listed below are appropriate for other countries, so as always DO YOUR RESEARCH.
Expense #1: Mortgage Interest
Mortgage payments consist of two parts: the principal, the portion of the mortgage that goes directly towards paying back the loan and the interest portion which is the portion paid to the bank as a fee for getting the loan. As a real estate investor, you are entitled to deduct the interest paid on your property throughout the year. This is viewed as a business expense incurred by the investor, and paid to the bank, to facilitate your real estate operations. The breakdown between these two components can be found on your annual mortgage statement provided by the lender/bank, or can be calculated using a handy mortgage amortization calculator like this one.
Expense #2: Line of Credit Interest
Many serial real estate investors will turn to refinancing equity built up on existing properties to facilitate a down payment on additional real estate. As long as the equity is being refinanced for investment purposes, the interest paid on those loans is also tax deductible. It is always recommended that lines of credit be split between personal use and investment use. Otherwise, you will be expected to keep track of how much interest is supporting investment operations versus personal use. Interest paid on borrowed funds for investment purposes are tax deductible, interest paid on borrowed funds for personal use are not. Make life easier for yourself and keep them separate from the start!
Expense #3: Insurance
The cost of insurance on a rental property is an operational expense and is tax deductible. Keep in mind that the kind of insurance needed for a rental property is very different from your standard primary residence homeowners policy. It is important that you contact your insurance provider and let them know of any changes in use of one of your properties. Overall, you can expect to pay more for a rented dwelling policy than you otherwise would pay for a personal use homeowners policy. I won’t get into all the math but the general rule of thumb is that more risk equals higher rates. Tenants do not have the same interest in keeping the property maintained as you would as an owner. Hence the higher premiums.
Expense #4: Maintenance
Any repairs or maintenance conducted on an investment property is tax deductible. In general, this tends to be one of the harder categories for investors to wrap their minds around. It can be difficult to determine whether an incurred expense should be capitalized or whether it should be expensed in the current year. In general, if the incurred expense will provide a lasting benefit or advantage to the property, it can be capitalized. If the expense reoccurs after a short period of time (e.g painting) then it is a current expense.
For more information on how the CRA classifies expenses between Capital Expenses versus Current Expenses, please see here.
Expense #5: Property Management
Unless you are managing the property yourself as an active source of income, odds are that you have hired a property manager and pay property management fees to take care of the place. Any fees paid for property management, and any fees paid to realtors to fill the property are all tax deductible. Remember that all expenses require receipts to support your tax deductions. Ask your property manager or realtor for that invoice ASAP!
Expense #6: Taxes
As Benjamin Franklin said, “Two things in life are certain: death and taxes.” Lucky for us property investors, any municipal and school taxes paid on the property are considered an operational expense and can be deducted. One of the most overlooked property tax deductions is the “Land Transfer Tax” which often takes place in the year of purchase. Since this is largely handled by the lawyer, investors often forget to add it to their list of deductions.
Expense #7: Utilities
Utilities include gas, oil, electricity, water, collection services and cable. Some investors prefer that the tenant pay their own utilities, others recognize that under the right circumstances, utilities provide an avenue for additional cash flow. When utilities are handled by the owner, not the tenant, they can be deducted as an operational expense. In the right market, including utilities can boost the value of your rental beyond their marginal cost. Consider the following example:
On average, with regular use, a single family detached dwelling costs $200 per month in utilities. Looking at similar rentals in the area, you notice that listings for rentals including utilities cost on average $300 more per month than similar rentals without utilities included. Our prospective renter is a single father who will be seeing his kids on weekends and who travels a lot for work. Not only will you be able to deduct the cost of utilities which are likely to be less than $200 per month in this situation, but I am making an additional $100+ per month in income due to the perceived value in a “hassle-free” rental.
Keep in mind that the above example does not come without risk. In the same situation, if our prospective renter turns out to be a bitcoin miner that skyrockets our electricity bill, we are stuck footing the cost.
Expense #8: Advertising
Any advertising costs incurred for the purposes of findings tenants for your investment property are considered deductible expenses. This includes SEO fees, priority listing fees on Kijiji and similar websites, as well as any “For Rent” signs or newspaper classified listings.
Expense #9: Capital Cost Allowance
Capital cost allowance (CCA) is the wear and tear on the investment building. This depreciation in value can be deducted against your rental income. CCA provides a little known income deferral mechanism similar to an RRSP. It provides a way to defer rental income tax on your property until the year in which the property is sold. By selling it, any CCA deductions in prior years would now be classified as income for this year. Outlining the specifics and recommendations on when to leverage CCA would be an article onto itself. Suffice to say that, in general, if your real estate operations are incorporated then it is always advised to deduct capital cost allowance against rental income. Under personal taxes, the benefits of capital cost allowance are not as clear due to marginal taxation.
Expense #10: Travel
This category differs depending on whether you have one investment property, or 2+ investment properties. To be eligible for the multiple investment property criteria, there must be at least 2 separate investment properties from your principal residence. Basically, this means that renting your basement out does not contribute towards this criteria.
Under the single investment property scenario, auto mileage and motor vehicle expenses can be deducted if:
👉 You are performing repairs and maintenance on the property.
👉 You are using your vehicle to transfer tools and materials to the property for the repairs or maintenance.
👉 The property is located in the same general area as your primary residence.
Under the multiple investment property scenario, on top of the above motor vehicle deductions for repairs, you can deduct:
👉 Fees incurred in collecting rents
👉 Fees incurred for generally managing the property or supervising repairs
As per the CRA website, travelling expenses includes any costs associated with getting to your rental properties but does not include the costs of lodging. Any hotel or AirBnB fees paid to stay in the vicinity of your rental property are considered to be personal expenses.
To sum it up…
Real Estate investing can be an incredibly rewarding endeavour and it is so important to educate yourself on the ins and outs of the tax system to ensure you’re getting the best ROI. The items we listed out above are by no means exhaustive, but are items that are often overlooked. The hope for this article is to get you thinking bigger about your income property. We hope you found this article helpful and as always, leave any comments down below!
Disclaimer: we are not financial advisors and all items mentioned in this article are based on our experience and research. Please be sure to do your own research and ensure that you’re following the law and the advice of professional financial planners, accountants and lawyers. If you have any questions or want to do your own research, look up your local government’s rules and regulations around investment properties.
