Tax Time 2018: Reminders For Anyone Who Owns Property & Files Taxes In Canada

Well, it's mid April and the weather is (finally) starting to break. This means tax season is in full swing and hopefully most of you have finished your bookkeeping and begun meeting with your tax professional. Today we are going to share a couple real estate related reminders that may apply to your tax situation this year.

Reporting the Sale of Your Principle Residence

Up until the end of 2016, when you sold your personal residence, you didn’t have to report the sale on your tax return. In 2017, this rule changed; going forward you are required to both report any principle residence sale and to designate which property (if you own more than one) is your principle residence. For more info on this check our past blog post of the subject here.

Home Office Expense

Are you self employed? Do you have a home office? You’re most likely entitled to a deduction related to this. To use an example: Say you own a home that is 1000’ and you use one of the bedrooms exclusively as a home office and it's 100’. Therefore, 10% of the home is a home office. You would be entitled to deduct 10% of your expenses related to the home. Examples of expenses in this case include mortgage interest, property taxes, utilities, insurance, condo fees/HOA, etc.

Mileage – Automobile Expenses

Do you own an investment property or properties? Do you have to drive around to manage them? Whether it be for repairing something, collecting rent, showing vacancies, etc, you are entitled to a deduction related to automobile expenses you are incurring to earn that rental income. That can be expenses such as gas, repairs/maintenance, lease payments, etc. Now in this case, it's important to track your mileage for when you are using your vehicle for these investment property purposes—a portion of your auto expenses will be a tax deduction.

Depreciation

Here is one topic that is often misunderstood. On investment properties, you are able to depreciate the value of the building (excluding the land) and that becomes an annual expense against rental income (up to a maximum of 4% of the building value). It basically lowers your book value by the amount of deprecation you take, so it acts as a tax deferral more so than a deduction. You end up paying less income tax yearly on your rental income but end up with a bigger capital gain down the road when selling. Some investors do it and some don’t, but tax deferrals are generally beneficial as a tax planning tool. For more info on this topic see our previous posts on the subject here and here.

We are not tax professionals in any way, so we would defer to your tax professional’s advice on any of these subjects and how they relate to your personal situation. We hope this is a helpful checklist as you file this year. Happy filing! ☺

Tax Time – Income & Expense Categories

As we approach the end of tax season, hopefully you haven’t procrastinated.  For you tax filers (early or late) with income property, today we are going to discuss income & expense categories to include when filing your return for an income property.

As a person with income properties, for each property, you will file a form called a “Statement of Real Estate Rentals”. On this form you are basically showing what your net taxable rental income is for that property, for the year.  To come up with this net income amount, you must provide your rental income for the year and subtract all related expenses. But what items should be included in these calculations?

Income

1. Rent – all rents for your property.
2. Parking Income – any parking fees charged.
3. Laundry Income – any laundry fees charged.
4. Other Income – ie. solar panel income or other miscellaneous income.

Total these income items up and you come up with your Gross Rental Income.

Expenses

1. Advertising – any expenses related to advertising the property for rent.
2. Insurance – any expenses related to insuring the property.
3. Interest – any expense incurred by borrowing to acquire the rental income.  Most notably the mortgage interest.
4. Office Expenses – ie. office supplies.
5. Legal, Accounting & Professional Fees – any expenses related to hiring a professional in running the property, ie. bookkeeping.
6. Management/Admin fees – ie. expenses related to hiring a property manager.
7. Maintenance & Repairs – ie. fixing broken window, snow removal.
8. Salaries, Wages & Benefits – any employees you pay to run your properties.
9. Property Taxes – city property tax paid.
10. Travel – any travel costs to acquire/sell/manage a property
11. Utilities – any utility costs paid by the landlord.
12. Motor Vehicle Expenses – you are allowed to deduct vehicle expenses directly related to driving for purposes of managing the property. This is a grey area and detailed records should be kept for proof.
13. Other Expenses – any other expenses not mentioned above.

Total these expenses to come up with your Deductible Expense Total.

Taking your gross rental income minus your deductible expense total will give you a net income (loss) before adjustments. At this point you are able to deduct your CCA allowance (depreciation) to come up with your net income. This net income amount will be added to your other income sources for the year for tax purposes.

What has been your experience with the Statement of Real Estate Rentals Form?

Tax Time – Depreciation Explained Part 2

As we get further into tax season, our topics are getting more in-depth.  Last week we did an intro into depreciation expense for tax purposes. This week we are going to discuss considerations when dealing with depreciation on your property.

Depreciation in Year 1

In the year that you acquire a property, the depreciation rule is a little different.  No matter if you bought the property in January or December of that year, CRA allows a 50% or half-year rule for depreciation purposes. So if your CCA for the year is $10,000 for a full year, in the first year you’re only allowed to claim half that amount or $5,000.

Tax Effects from Depreciation when selling a Property

Selling the property may result in a “recapture” of your CCA. You would add this recaptured amount to your taxable income when preparing your tax return. Recapture may happen if upon selling the property, the proceeds from the sale exceed the remaining undepreciated capital cost. Your undepreciated capital cost is the capital cost of all your depreciable property in the class subtracted from the allowance you claimed in prior years. Alternatively, you might be allowed to take a “terminal loss” deduction from your income. Terminal loss is when you don’t have any depreciable property in the class at the end of the year, but you have an outstanding CCA amount that you have not claimed. When viewing depreciation in this light, it acts more as a tax deferral until sale.  For example, say you bought a property many years ago for $200,000, and over the years you depreciated it so that you had a book value (or undepreciated capital cost) of $100,000, and sold that property for net price of $250,000. $50,000 ($250,000-200,000) will be taxed as a capital gain (or 50% of the gain will be taxed), and $100,000 ($200,000-$100,000) will be the depreciation recapture (100% of this amount will be taxed). This is sometimes a confusing calculation and is best done in conjunction with an accounting professional.

When Rental Expenses Exceed Income

If your rental expenses exceed your gross rental income, you have incurred a loss. You may be able to deduct your rental loss from other sources of income, but you cannot use CCA to increase or produce a rental loss.  For an example, say you had a year with lots of repairs and maintenance or lots of vacancy and you only ended up with a net income of $2,000, but you have a CCA amount for the year of $5,000 that you can use as a depreciation expense, you wouldn’t be able to use the full $5,000 to create a $3,000 loss ($2,000-$5,000) to deduct from other sources.  You would only be able to use $2,000 in this case to decrease your net income to zero.

Overall, there are pros and cons to taking CCA. On the upside, the allowance lowers your taxable income, which ultimately reduces your tax liability. On the downside, when you sell the property all prior CCA claims are recaptured and treated as taxable income, which increases your tax liability.  This can be a benefit if used correctly as a tax planning tool but can also be used incorrectly with tax consequences. This type of tax planning should be discussed with a professional.

Have you had a discussion with your accountant regarding depreciation cost/benefit for your tax situation?

Tax Time – Depreciation Explained Part 1

Now that we are fully into tax season, we are going to dive deeper into a confusing tax subject: depreciation.  We touched on this subject briefly in our post from last week, but this topic deserves its own post. We frequently witness the impact of depreciation with our clients. Often, these impacts aren’t fully understood until tax time!

One of the benefits of owning rental properties is the claiming of expenses as deductions against rental income. This leads to a reduction in taxable income for that year. Typical expenses include property taxes, insurance, repairs and maintenance, mortgage interest, and more.

Another expense (unlike the above cash expense) is an accounting expense, the ability to claim depreciation. This expense in Canada is referred to as a Capital Cost Allowance (CCA). This capital cost allowance includes capital costs of a property including the purchase price, legal closing costs and renovations that can’t be expensed. For example, if you purchase a property for $300,000 and spend $5,000 on closing costs and $20,000 on renovations, you’ll have a value of $325,000 for CCA purposes.

There are different rates of CCA that you can claim, but in most cases the rate is 4%, which applies to most buildings that were obtained after 1987. The most used method for claiming CCA is the Declining Balance Method. In this case, your CCA amount is based on any allowance claimed in prior years, subtracted from the capital cost of the property. As you claim the CCA, in subsequent years your remaining balance declines. You can claim any amount of your allowance for the year—you do not have to the take the full amount all at once. For example, you might want to hold off on claiming your CCA if you don’t owe any taxes for the year, since taking the allowance lowers the amount you’re entitled to in upcoming years.

To better illustrate the declining balance method, imagine you have a property with a CCA value of $300,000 and the 4% rate is applied to your property. You can claim $300,000 x 4% = $12,000 of depreciation expense in that tax year.  The next year your new CCA balance would be $300,000-$12,000= $288,000. This new value would be applicable to the depreciation expense for the next year.

Next week we are going to discuss other considerations involving depreciation or CCA. 

Do you take depreciation expense on your rental properties?

Tax Advantages of Owning Real Estate

With April arriving at the end of this week, tax season is officially upon us. I know most of you view taxes as a dry subject that isn’t particularly exciting. That being said, there is one element of the subject that always gets people excited - paying less taxes!

There are many tax advantages to owning and investing in real estate. Although we aren’t accountants, and would defer any specific question regarding your tax situation to a professional, there are a few broad tax advantages that you should all be aware of.

So without further ado:

1. Capital gains on a principal residence are tax free. So say your one of those lucky Vancouver home owners who bought their house 30 years ago for $100,000 and are now selling it for $3,500,000, those proceeds are your tax free. There are some complications if you also own a vacation home and are unsure which property is your “principal residence”. You may also have a hard time with CRA if you are a contractor and buy and sell your principle residence for profit multiple times. Talk with your accountant about some of these scenarios.
2. Financing costs related to an income property are tax deductible. The general rule is, if you're borrowing money to invest to make income, the interest costs with that borrowed money are tax deductible. For example, if you buy a duplex for rental income, and get a mortgage at 3% interest, and you are in a 40% tax bracket, your after tax cost of borrowing becomes only 1.8% ((3%*(1-0.4)). This makes your return on cash invested potentially very attractive.
3. Depreciation can be claimed as an expense against rental income. You are able to depreciate the value of the property every year (usually up to 4% of the value of the building), which will lower your taxable rental income in that year. So for example, if you had a property with $10,000 of taxable income, and property with a book value of $200,000, you could claim a depreciation expense of $8000 ($200,000*4%), lowering your taxable income to $2,000 for that year. This basically acts as a tax deferral, which can come in very handy in tax planning. Also note, that claiming this depreciation lowers your book value and will increase your capital gain down the line when you sell. This can be a complicated subject and should be discussed with your accountant.
4. Properties can be owned in personal names or owned in holding corporations. Different ownership structures can provide different opportunities for tax planning and flexibility. Owning in a corporation can also have legal liability advantages. Again another subject to discuss with your accountant.

While this is far from an exhaustive list, these are some of the tax advantages related to real estate you should be aware of this tax season.

Are there any tax benefits you enjoy from your real estate ownership?

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Russel Lalovich
russel@lalovichrealestate.com
Office: (519) 966-0444
Cell: (519) 995-5620