If you rent out one or more rooms in your home, or if you own a rental property, there are many expenses that can be deducted in calculating your net rental income. These expenses include, mortgage interest (but not principal), property taxes, utility costs, house insurance, maintenance costs, advertising, and property management fees. Rental income and expenses can be recorded using the cash basis of accounting, unless the property rental is considered business income, in which case the accrual basis of accounting must be used. See Rentals – Property or Business Income for more information.
There are some other things that you need to keep in mind:
- Rental losses can generally be used to reduce income from other sources. If the rental loss exceeds income from other sources, and cannot be deducted on the current year tax return, it becomes a non-capital loss, which can be carried back or forward to reduce taxable income in other years.
- If you rent out only a portion of your home, you would only be able to deduct a portion of the costs. If you rent a room to a friend or relative at less than fair market value and this results in a rental loss, you would notbe able to deduct the rental loss.
- Capital cost allowance (CCA) may be claimed based on the purchase price of the building, furniture and fixtures, etc., but not the land, and may not be used to create or increase a rental loss. If you only rent a portion of your home, then you would only be able to claim a portion of the CCA, and this may result in the loss of the principal residence exemption when you eventually sell your home. The claiming of capital cost allowance will probably result in a recapture of the CCA when the property is sold. This will happen if the selling price of the building is greater than the remaining undepreciated capital cost (UCC) at the time of sale. The difference between the original cost and the UCC will be added back to income. If the selling price is greater than the original cost of the building, then the difference between the selling price and the original cost will be a capital gain. When purchasing or selling a rental property, it is important to break down the purchase or sale price between buildings and land.
- A change in use of your home from personal residence to rental property, or from rental property to personal residence, can result in a deemed disposition for tax purposes. This means that you will be considered to have sold your home and repurchased it immediately thereafter for fair market value. There are many factors which affect this, and professional advice is recommended.
- Net rental income or loss is reported on line 126 of your personal tax return. This net income is included in “earned income” for purposes of calculating your allowable RRSP deduction limit for the following year.
Canada Revenue Agency (CRA) has a Rental Income Guide (T4036) which goes into detail about deductible expenses, capital cost allowance, deemed dispositions, and most issues regarding property rental.
The information and tips we’re sharing in this article are meant to be a starting point for your year-end tax prep, so you can be informed and feel confident when working with your accountant. Be sure to check with a tax expert in your country or region for any specific advice you need, as each business (and tax district) is different. As our lawyers would say: “This article is for informational purposes only. It should not be considered legal or financial advice.”