DEDUCTIBLE EXPENSES - RENTAL PROPERTY
Do you have a rental property or thinking of buying one but not sure what expenses to deduct from your rental income.
Any expenses incurred to earn the rental income are deductible for tax purposes. If your tenant reimburses you for these costs, you either have to report the receipt as income or reduce the expense by the reimbursement. These expenses must be supported by receipts. The following are some of the expenses you should consider when preparing the rental property income tax information:
Most banks provide an annual mortgage statement. If your bank does not provide an annual statement, you need the terms of the mortgage in order that an amortization schedule can be prepared for the period these terms apply to.
Mortgage interest is only deductible if the funds were used for the rental property. For example if you borrowed money by mortgaging your rental property and then used the funds to buy your personal home, the interest is not deductible.
The total property taxes for the year are on your Final Property Tax bill. If you pay your property taxes with you mortgage, the annual mortgage statement may also provide this information.
Utilities, which you pay for the rental property, can also be deducted. These include hydro, gas, and water.
Insurance premiums for the property insurance are deductible. Life insurance is also deductible if required for financing for the rental property.
Repairs and Maintenance:
These include any repairs and maintenance done on the rental property such as landscaping costs, painting, or cleaning services. Larger repairs such as replacing the roof or the windows are also deductible.
It is important at this time to distinguish between repairs and capital expenditures. For repairs, the total cost is deductible in the year it is paid. For capital expenditures, a percentage of the cost is expensed each year.
Generally, a repair fixes or replaces an item on the property that was already there to maintain the normal expected life of the rental property. Capital expenditures add to the value of the property. For example, replacing all the fixtures in an existing bathroom would be classed as a repair. Adding a new bathroom to the building would be considered a capital expenditure.
If you are paying a management agent to take care of your property for you, then these fees are deductible. These would also include condo fees.
Legal and Accounting Fees:
Although these are not required to earn the rental income, they are however necessary administrative functions and are therefore also deductible. These include bookkeeping costs and cost of preparing your rental statement for income tax purposes and also legal fees incurred in collections of delinquent accounts.
Vehicle expenses incurred for the purpose of the rental property can also be deducted. This may involve traveling to and from the rental property or to do miscellaneous errands such as purchasing supplies or doing repairs and maintenance. However, you must be careful to exclude any personal portion of the vehicle expenses. If you are using the vehicle for other purposes, you must keep proper records of the kilometers driven for the rental property. This can be accomplished by keeping a log noting the date, purpose and number of kilometers driven. You cannot deduct motor vehicle expenses you incur to collect rents. These are personal expenses.
Other expenditures, which you may incur include office expenses, telephone, cable and advertising costs.
Below are the list of expenses that you cannot use as a rental expense.
Land transfer taxes
You cannot deduct land transfer taxes you paid when you bought your property. Add these amounts to the cost of the property.
You cannot deduct the repayments of principal on your mortgage or loan on your rental property.
You cannot deduct any penalties shown on your notice of assessment or notice of reassessment.
Value of your own labour
You cannot deduct the value of your own services or labour.
Personal portion of expenses
If you rent part of the building where you live, you can only claim the amount of your expenses that relate to the rented part of the building.
Please remember, the most important thing when claiming rental expenses is to have accurate records and keep all receipts and invoices. Any questions in regards to other expenses please consult your tax accountant.