Purchasing a second piece of real estate has its costs, but what expenses can be deducted and claimed for income tax purposes?
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If someone owns a second property, what can they deduct? Can they deduct the cost of purchasing or renovations?
—Nicole
There are several expenses that can be deducted from a second property, particularly if it is designated as an investment property, meaning its purpose is to generate income for you.
Expenses such as interest costs, utilities, property tax, repairs and renovations can be deducted, according to the Canada Revenue Agency (CRA). Some expenses, called current expenses, are only deductible in the year you incur them. And others, known as capital expenses, are deductible in future years.
Current expenses are costs that you incur to maintain the property, such as minor repairs and maintenance, as well as interest, property taxes, professional fees (legal, accounting, bookkeeping, property management and auditing), advertising, and so on.
Capital expenses are those that either improve the property’s market value, extend its duration or adapt it to a totally different use. For example, renovation costs. A capital expense will need to be divided in very specific ways and applied over a few tax years as capital cost allowance (CCA).
You do not have to claim the maximum amount of CCA in any given year. You can claim any amount you like, from $0 to the maximum allowed for the year. If you do not have to pay income tax for the year, then you may not want to claim CCA.
The one cost you cannot deduct from your gross rental income is the cost of purchasing the property. You can, however, add it to the cost of your purchase to be deducted when you sell your property. This will impact how any capital gains or losses are calculated and taxed on the sale of your second property.
Another thing to note is that all these deductions are based on the assumption that you are generating income, or at least attempting to generate income from the property. It is possible to claim a rental loss if your expenses exceed your rental income. This rental loss can be claimed against other sources of income. Be sure to verify the expenses are properly classified, calculated and provable.
When there is no rental income, it is still possible to deduct the costs of maintaining the property, but keep in mind that the property must be vacant and available on the market to be rented.
This column was written by Seun Adeyemi, CFP, CKA at True Wealth Advisors.
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We inherited my mother’s condo and sold it last year. We waited one year for probate to clear and held onto the property empty for a total of 3 years . I understand we need to claim the capital gain (sold price less probate cost which nets to over $250K?) but not sure what expenses I can deduct. I believe I can deduct legal and realtor fees (plus applicable HST paid?). We paid for renovations to enclose a den so it could become a second bedroom. We also installed a laundry centre in our storage room. I know a little late for a response before the tax deadline but I will remit according to the maximum taxes owed and refile an admendment later. Thank you.
Due to the large volume of comments we receive, we regret that we are unable to respond directly to each one. We invite you to email your question to [email protected], where it will be considered for a future response by one of our expert columnists. For personal advice, we suggest consulting with your financial institution or a qualified advisor.