Landlords: Start Here! Rental Income and Your Taxes
If you're like 15% of Canadians who are landlords or the 37% who are considering it with their next home purchase, the fact remains the same: there are a lot of things to consider.
You need to make sure the property is well-maintained and find good tenants. You also need to make sure you're following your area's obligations when it comes to things like safety standards and rent control.
But one thing that often gets overlooked is accounting and taxes...that is, until tax time!
Don't worry, we're here to help! This blog post will discuss how rental income is taxed, answer some commonly asked questions, and give some tips to help you get organized.
Is Rental Income Taxable?
Simply put: Yes.
Rental income is taxable and would be included in the tax return for that year. (i.e., rent collected from January - December 2021 would be included in your 2021 tax return).
However, you'll see that there are deductions that you can claim against your rental income. These deductions can help to reduce the amount of tax that you owe.
How much you are taxed depends on how the property is owned. There are (generally) three ways you can own property:
Personally
In a partnership
As a corporation
If you own the property personally, you are considered a sole-proprietor, and you will be taxed based on your personal income rate. You will have to file a Statement of Business or Professional Activities (Form T2125) document, which tallies your income.
If you own the property with others (even family members), it is considered a partnership, and your income will be determined based on the percentage of ownership you have. You may have to file documents in this instance (to find out more, contact us).
If a corporation owns your rental property, then the corporation will pay taxes on that income based upon the federal and provincial corporation tax rates.
What about Security Deposits? Are those taxable?
Short answer: it depends.
If you plan on giving the security deposit back to your tenant at the end of their tenancy, then it is not considered taxable income.
However, it would be considered taxable income if you keep the security deposit because of damages done to the property or unpaid rent.
What Rental Expenses Can I Deduct?
There are several rental expenses that you can deduct when preparing your taxes. These include:
General cleaning and maintenance
Repairs to the property
Advertising costs
Property tax
Depreciation
Mortgage interests
Insurance premiums
Utilities (if your tenant isn't paying them)
Specific travel/vehicle expenses
Garbage removal fees
Note about travel expenses: if you are considered a sole proprietor, you need to keep a travel log to write off any travel or vehicle expenses. The log should include the date, time, destination and purpose of the trip.
Preparing for Taxes
As with any business, the key to preparing for your taxes begins well before tax season. Throughout the year, you should keep track of your rental income and expenses.
There are a number of ways you can do this, but we recommend using accounting software like QuickBooks. These platforms make it easy to track your finances and generate reports come tax time.
Another tip is to open a separate bank account for your rental income. This will help you track your finances and ensure that your personal and business expenses are separate.
Landlord like a Landboss
We know "landboss" is not a word, but it makes the point: your rental property is a business, and you would be wise to treat it like one.
Therefore, we encourage you to be a Money-Smart CEO - someone who is empowered to understand their finances and make wise decisions. Learn more here.
As well, it is crucial to have your taxes prepared by someone who understands the ins and outs of rental properties. At Jennifer Kapedani, CPA, we help many rental property owners maximize their tax savings, and we're here to help you every step of the way.
If you have any other questions, connect with us today, we'd be happy to chat!
