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Top 10 Deductions a Real Estate Investor Should not Miss [Revisited]

2018 is an exciting year.

I shared with all of you in an earlier blog post about my ‘why’, my reason for doing all that I do, which is to be the best I can be.

To do this with my accounting practice, I’ve made some plans to provide more value to my clients.

One of which is to add some value-added services to my existing clients.  

I did my first ever client only webinar Wednesday night – “don’t get caught off guard by CRA’s audit”.

We offer a fee protection service.  If a client ever gets audited, we can represent the clients without charging any additional fees.

I’ve been involved in a few audits.  It’s never fun to go through an audit to begin with.

It sucks even more if you have to pay several thousands in professional fees to have yourself represented.

When I discovered the insurance policy available to limit the client’s exposure, I quickly jumped on it.

This service will be the start of 2018.  

We are going to share with our clients next month how I personally use multiple apps to organize my own receipts among the several entities I’m involved in.  

I also got one client who’s already on the same system to share his experience in the upcoming webinar.

For my clients, please register early to save your spots.  We are limiting it to 26 people.

Now, onto this week’s topic.

In light of the preparation of the upcoming personal tax season, I would like to repost our previous blog post about top ten tax deductions you would not want to miss as a real estate investor.

Mortgage interest, not the mortgage principal

Many real estate investors think cash flow as their net income and they think that they get taxed on their net cash flow.

Monthly mortgage payment consists of mortgage interest and principal pay down. Mortgage interest is a deductible expense but principal pay down is not.

The breakdown between the two can usually be found on your annual mortgage statement you receive at the beginning of next year.

When you estimate the tax liability owing, you need to add your net cash flow to the mortgage paydown to compute your taxable income.

Insurance

Insurance coverage for rental properties is different than the home that you live in. Make sure you notify the insurance company about the change of use and that appropriate coverage is taken.

Generally speaking, insurance premiums on rental properties are more expensive than your personal home.

Advertising

Any advertising cost incurred for the purpose of renting out the property is deductible. This includes all the Kijiji ad costs, ‘for rent’ signs that you purchase from Home Depot or specifically made for your property, etc.

Property management fees / commission you paid to fill the property

If you hire a property manager or use a realtor to fill the property for you, these are all deductible expenses. Make sure you get the invoice from them to support your expense.

Repairs & maintenance

Repairs & maintenance are generally deductible expenses. The tricky part is to determine whether an expense incurred should be capitalized or should be expensed. If you paint the house, generally speaking it is a deductible current year expense. If you pay for the stamp concrete for your driveway which did not exist before, this will be capitalized and appropriate capital cost allowance can be taken on it.

Property taxes and utilities

Municipal property taxes and utilities are generally deductible against the rental income. One of the most missed property tax and utilities deduction is at the year of purchase or the year of sale. Some of the adjustments are handled by the lawyers and many investors would miss these deductions.

Specifically for investors who converted their primary residence to a rental property, only the expenses related to the rental period would be deductible.

Financing charge

Financing charge is usually one of the most missed deductions for real estate investors. Some real estate investors incur mortgage insurance expense or finder fees for their mortgages. These expenses can be deductible over a period of time but a lot of real estate investors miss it.

Auto mileage

This one is tricky. Different criteria apply if you own one property versus when you own more than one property.

For investors who only own one property, you are only allowed to deduct motor vehicle expenses if

  • The rental property is in the same general area that you live in
  • You do repairs & maintenance for your property
  • You have vehicle expenses to transfer tools & materials to the property

But you cannot deduct the expenses you incur for the purpose of collecting rent if you have only one property.

Now for investors who own more than one rental properties, on top of the expenses incurred for repairs & maintenance and transferring tools & materials as mentioned above, you can also deduct the following expenses:

  • Collect rents
  • Supervise repairs
  • Generally manage the properties

To qualify for the multiple properties criteria, they must have at least two different locations than your principal residence. This means that if you rent out your basement apartment and have one single family detached home as rental property, you still cannot deduction any expenses incurred for collection of rent, supervision of repairs and general management of the properties.

Capital cost allowance

Capital cost allowance is the tax term Canada Revenue Agency uses to represent the wear and tear on the building. It is a deferral mechanism allowed by CRA to defer the income on your properties until the year you sell it.

When you sell it, all the deductions taken throughout the year have to be reported as income.

Line of credit interest

Many real estate investors start out by refinancing their own home to obtain the downpayment of their real estate investment.

As a general rule of thumb, any expenses incurred for the purpose of earning income are deductible subject to a list of exception in the Income Tax Act.

To add to the above list, I would also like to mention the ability to deduct Home Office expense, if you use home office as an exclusive place to manage your rental property. 

Until next time, happy Canadian Real Estate Investing.

Cherry Chan, CPA, CA

Your Real estate Accountant

10 replies
  1. Lei
    Lei says:

    Can you deduct the expenses for a property that you did not end up buying? For example, I have incurred about $5000 for appraisal, inspection and structural engineer inspection for a rental property that I was buying. We ended up not getting the property because of some structural issues that needs immediate attention. Thanks.

    Reply
    • Cherry Chan
      Cherry Chan says:

      Yes. But you will have to provide proof of all the documents and the nature of the loss has to follow the nature of the transaction.

      Reply
      • Marie
        Marie says:

        Hi Cherry, with regards to your answer to Lei’s question and all the potential deductions you mentioned in your blog, do they also apply to a first time home buyer that started using the property as a rental property after a week or two of possession?
        Can expenses prior to buying the first property be deductible? (example, inspection and appraisal?)

        Reply
  2. Mat
    Mat says:

    Hi Cherry, love your blog. Can you go into a bit more detail about CCA? How its calculated and what happens when you sell.
    Thank you
    Mat

    Reply
    • Cherry Chan
      Cherry Chan says:

      I wrote many blog posts about CCA. You can use the search function and type in Capital Cost Allowance and all relevant blog post will come up.

      Reply
  3. Rajeev Shanmugalingam
    Rajeev Shanmugalingam says:

    Great article! Thanks for writing this.
    I’m also interested in the Capital cost allowance question.

    Reply
  4. Cherry Chan
    Cherry Chan says:

    I wrote many blog posts about CCA. You can use the search function and type in Capital Cost Allowance and all relevant blog post will come up.

    Reply
  5. Andrew H
    Andrew H says:

    Hi Cherry,
    Love your website and blog! In your first year of ownership of a rental property owned personally can you deduct i) the title insurance premium ii) Bank property valuation iii) legal fees for purchase? Thank you very much!

    Reply
    • Cherry Chan
      Cherry Chan says:

      These expenses cannot be deductible as current expense.

      They should be added to the cost of building and deduct against future sale.

      Reply
      • Andrew H
        Andrew H says:

        Thank you for the clarification Cherry.

        Reply

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