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By Jillian Koch - JMH & Co

Getting into the Rental Property Business – Things to Know

Jan 28, 2022 | 2:20 PM

As travelling ramps up again and vacations start taking place, you might be thinking to yourself, “I should get into real estate”. Perhaps you want a home away from home that you can rent out for part of the year and use during your time off.

Here are five quick things to remember:

1. Report that Income

If you are collecting rent on a property, you need to remember to report it on your tax return. And it’s not just cash rent that needs to be reported. You would also need to report if the tenant’s rent is reduced because they are providing services (such as maintenance). Perhaps the rent was reduced by $100 per month to recognize this work. Don’t forget to include that information.

2. Keep Track of Your Expenses

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Just like with any other business, you have the ability to deduct reasonable rental expenses that you incurred to earn income. This means you want to keep track of those costs associated with the property – such as advertising for a tenant, insurance premiums, and interest costs related to a mortgage or loan on the property.

Now, if you are using the rental personally as well, you won’t be able to claim 100% of those costs. Instead, you will need to examine how much of the property you are using personally and reduce the costs accordingly. Perhaps that number is based on days of use or square footage of use.

3. Be Careful with Depreciation

Unlike your personal home, a rental comes with an added perk. You are able to choose to depreciate (or write off) a portion of its original cost over time, helping you reduce the overall net income on your rental.

But before you get too excited, there are a couple of things to keep in mind.

This is only available to the extent that you have net rental income – in other words, if you already have a loss, you can’t make the loss bigger by depreciating the property.

Plus, any depreciation you claim gets placed back into income upon the sale of the property – up to the original cost of the property or the proceeds (whichever is less). Sounds complicated, right?

Let’s say the rental house had a value of $100,000. Over ten years, you depreciated on average $3,200 per year for a total of $32,000. If you sell your house for $120,000, you will be bringing $32,000 back into income. So while you got the deduction spread out over those ten years, the income comes into play in one year – the year of sale.

4. Selling Your Rental

When you eventually sell your rental property, there are two separate components you need to consider. The first is the “recapture” of your previous depreciation claims we’ve already mentioned. The second is the overall increase in value that the property may have experienced.

Working with our previous example, if you are selling the house for $120,000 when you initially paid $100,000, you will have a capital gain of $20,000 that gets reported. The good news is that only 50% of that is taxable – meaning that $10,000 will be added to your total income for the year.

5. Holding a Foreign Property

If your property is outside of Canada, you are going to have other considerations you need to look into. For instance, if you own a property in the US, you will likely have US tax reporting obligations. This will mean that you report the income both on a US tax return and then report it on your Canadian tax return. The good news is that Canada has numerous tax treaties with other countries preventing you from being double taxed!

Getting into the rental game can be tricky and getting out of it can provide a shock at the tax amounts. It is important to consult your tax advisor as soon as possible so that the right choices early on for whether you should depreciate the property.

If you decide to get into the rental game, there are great resources out there for you. Don’t hesitate to reach out with an email to me and ask any questions that you may have.