When you decide to buy an investment property, we need to understand what and how are the tax implications. In this writeup, we will try to address and understand all these and more when it comes to buying a Real Estate Rental Property.
Net Income Calculation:
When you put a property on rent, the rent received from the tenants becomes our Gross Income, it would include all the rents received for the property. If the property has a paid shared laundry facility, that revenue from the laundry machines will be part of Gross Income. For tax payments, you take your Gross Income for the property and deduct any expenses incurred during the year. The resulting amount is the Net Income on which you will pay your taxes.
Now let's understand about expenses, they are of two kinds Current Expenses and Capital Expenses.
Current Expenses: These are expenses which provide short term benefit, like repairs to A/C unit which will allow it to function the same way how it was acquired. Costs incurred in the current year for home insurance, utilities, property taxes, etc.
Interest - Any mortgage interest component in your monthly mortgage which you pay to the lender for your borrowing is tax-deductible. Principal re-payment, as part of the mortgage, which builds your equity in the property is not tax-deductible.
Property Taxes - This is the house tax which municipality charges you based on the local municipalities tax rate and the MPAC assessment value. This amount paid to the city is tax-deductible in a rental property.
Home Insurance - The premiums which you pay for the coverage of your rental property to the insurance company is deductible on your taxes, the full premium amount. However, if you are having a portion of your primary residence as a rental unit, then only part of the premium would be qualifying for a tax deduction.
Utilities - are another significant expense when we buy an investment property and rent it out. If you pay the services (hydro, gas, water) as a landlord, they are tax-deductible.
Advertising - For leasing your unit if you put a classified advertisement in print or social media, this expense is claimed as tax-deduction.
Management Fees - If you pay a fee or compensation to a person or a management company for the day-to-day management of the investment property, this is tax-deductible.
Capital Expenses: These are long-term expenses, the expenses which provide us benefit for several years. For example, when we change the roof of an investment property, and we spend $10,000, its benefit will continue for 15 years. So, in this case, the deduction cannot be for the full amount, but the amount spread across many years.
These long term capital expenses will be deducted using Capital Cost Allowance calculations which your accountant would be able to determine along with you.
Hope this was able to clarify some haze around investment property and their tax liabilities. Feel free to reach out to our team on how we can help you in achieving your Real Estate Goals for ownership and investments.