What Real Estate Investors Need to Know About Taxes
Real estate can be a very good investment and it’s one that many Canadians choose. Not only can a person earn money by renting out their properties, but real estate tends to appreciate over time, leaving you with a good long-term investment.
Of course, as with any type of investment, it’s important to consider the tax implications.
Here are a few factors that you’ll need to keep in mind when investing in real estate.
Deducting Mortgage Interest & Property Taxes
Deductions are important when you’re investing in real estate. One very common deduction is mortgage interest. Remember, only the interest paid on your mortgage can be written off, not the entire mortgage payment. The principle portion is considered a repayment of a debt and thus is not tax deductible.
You can also deduct property taxes assessed by your province/territory as well as your municipality, for the period that the property was available to rent.
Motor Vehicle Expenses
Real estate investors who receive income from one rental property in the general area where they live can deduct motor vehicle expenses if:
- You personally do part or all of the necessary repairs on your rental property, and
- You transport tools and materials to that property in your vehicle
The situation becomes more complex if you own more than one rental property. In addition, you cannot deduct motor vehicle expenses for driving to collect rent.
Repairs and Maintenance
This is an area where people can get into tax trouble. Generally speaking, small repairs and regular maintenance are considered expenses and thus the cost of these repairs can be immediately deducted on your income taxes for the year. However, you cannot deduct the value of your own labour.
Larger renovations such as putting in a new kitchen or bathroom are considered making lasting improvements to your real estate investment. These are generally considered capital expenses, as they improve the property and generally increase the value of your investment (either by increasing the value of the property overall and/or by increasing the amount you can charge in rent). You typically must deduct the cost of capital expenses over the period of several years.
House flipping, or buying a property and either making upgrades to it or waiting for it to increase in value over time, and then selling it for a profit is a common real estate investment. It is also one that the Canada Revenue Agency (CRA) is interested in investigating.
Depending on your situation, profits from real estate flipping can be taxed as business income rather than a capital gain. This means you would pay taxes on 100 percent of the profit rather than 50 percent. The nature of the property, the amount of time you held the property, the circumstances surrounding the sale, and your intentions when purchasing the property will be used by the CRA to determine how you will be taxed.
The CRA has begun taking condo developers to court, seeking information on people who purchased under construction properties and then flipped the contracts before the property was completed. The CRA states that it requires this information to determine if taxes were paid correctly.
If you are a real estate investor who has now been contacted by the CRA regarding your tax situation, please contact us right away. Dealing with the CRA can be difficult and confusing and working with one of our ex-CRA professionals will help you understand your situation and navigate complex CRA processes.