Rental Property Taxes Planning Tips #1

Rental property owners can benefit from various tax tips to maximize their returns.

Firstly, it is important to keep detailed records of all rental income and expenses throughout the year. This includes collecting receipts for any repairs, maintenance, or improvements made to the property.

Start using a bookkeeping service or software. There's nothing as tedious as combing through last year's invoices, receipts, and credit card statements trying to match which expense to which property.

Secondly, it is crucial to understand the tax deductions available for rental properties, such as mortgage interest, property taxes, insurance premiums, and depreciation. These deductions can significantly reduce the taxable rental income.

Depreciation is your best friend. Canada's 'Capital Cost Allowance' rules vary depending on the asset. For most residential real estate rental properties, you can deduct up to 4% of the value of the unit (but not the land). You (or we!) must deduct the value of the land from the purchase price of the residential rental unit, and then apply the 4% depreciation to the remainder.

This 4% per year deduction also applies to major upgrades to your units such as a full roof replacement, addition, adding a porch, and so on. It's crucial that you add the cost of these improvements to your Unclaimed Capital Cost (UCC) in order to access the appropriate deduction.

Thirdly, if you own more than one rental property, consider scheduling major repairs in separate years so you can spread out the deductions over time. It's possible to have too many deductions such that applicable deductions can go to waste in a given year.

Lastly, it is advisable to consult with a tax professional who specializes in real estate to ensure compliance with all applicable tax laws and to take advantage of any available tax credits. By following these tips, rental property owners can effectively navigate the complexities of rental property taxes and minimize their tax liabilities.

We at Friendly Fox Tax Services are rental property investors ourselves. We understand the ins and outs, and the special nuances of rental property taxes. We know how to maximize your deductions and minimize your tax.