How should you report income on a co-owned rental property?

Claiming income on a co-owned rental property

Marie, who owns two rental properties with her spouse, noticed that their tax preparer didn’t allocate the income 50/50. Was that incorrect?

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Q. My spouse and I co-own two rental properties. Can we claim the rental income 50/50 on our tax returns?

I would assume the answer is yes. However, when looking back at our returns for the last few years, I noticed that the “professional” doing the returns didn’t allocate it this way.  Is there any circumstance that would allow it not to be a 50/50 split? I can’t find any specific information on the Canada Revenue Agency website that seems to address this. Any information you could give me would be greatly appreciated.
–Marie

 A. This is great question Marie, and one I am asked every tax season.

A rental property is a great way to build wealth. Serious wealth-builders will tell you that buying a rental property with a mortgage and having others pay down the mortgage is a smart strategy. The ownership of the property can be in the form of a co-ownership or a partnership that is not necessarily 50/50, but instead is in proportion to each owners’ investment in the property. Be sure to retain all documents that show the ownership percentages for your property throughout the duration of your ownership.

As you and your spouse are co-owners of the property, you both must report your share of the rental income or loss for the calendar year in proportion to your ownership. Your rental income must be reported in the same proportion every year unless there is a change in the proportion of ownership.

Capital Cost Allowance (CCA) is the Canada Revenue Agency (CRA) buzzword for depreciation. You are allowed to claim CCA on your rental property assets. The rate of CCA differs for different classes of assets, and your accountant can assist you in deciding which classes your particular assets fall into.

There are some fine points in regards to CCA that you should be aware of. First, if you claim CCA, it must be in the same proportion as your ownership. Second, claiming CCA is not mandatory and there may be some reasons you don’t want to claim it, such as the reduction of the adjusted cost base (ACB) of your property, which could affect your taxes payable in the future. That’s because CCA reduces your ACB, and therefore increases the capital gains when you sell. You can discuss this with your accountant to see what effect it would have on your taxes payable.

Third, you cannot create or increase a rental loss with CCA; and, finally, always complete the CCA schedule on your tax return for additions because even if you don’t claim the CCA, it will help you track the value of your capital expenditures on the property.

Theresa Morley, CAP, CA, is a partner with Morley Chartered Accountants in Barrie, Ont. She blogs at MorleyCPA.

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