Rental Property and Taxes

[sabad66]

I know there are a few landlords on here so hoping I can pick your brains.

Here’s my situation:
- bought a new house December 2018
- tried to sell my old house but after 2 months being listed, was unsuccessful in selling
- could not carry 2 mortgages any longer, so decided to rent old place starting March 1
- it’s approx $500/month negative cash flow
- paid 345k for the old place in May 2015. Value has gone down since then

My questions:
1. I guess my old place is now an investment asset. How do I determine the value of it at the time of transferring it into a rental? I think I want to have it with a higher value (as close to the 345k I originally paid as possible) so that if I sell in the future, cap gains would be lower. Assessed value is horrible being 285k so do not want to use that if I can avoid it
2. What can I track as costs? I am thinking:
- mortgage (do I need to split up between principal vs interest?)
- prop tax
- condo fee
- landlord insurance
- maintenance costs such as furnace cleaning?
- improvements (I.e. I am replacing a window at the unit next month)
3. Since it is negative cash flow, does this reduce my tax liabilities and if so, would it be against my earned income or would it be against capital gains/investment income buckets?
4. Any other tips/tricks I am missing to be able to optimize my situation?

I know all of these questions can be handled by an accountant but I want to see if I can figure it out on my own first especially since there is plenty of time until 2019 tax return season in 2020

Thanks in advance for any info!

[gwill]

You should be writing everything off in your existing house as a tax deduction. Any tools. Paint. lawn mower. Literally mostly anything you buy as an expense on your house could be explained as an expense for your rental.

Your losses arent put against gains in investments. You would put it against your income.

I assumed if I sold one of my investment properties at a loss that it would counter gains in stocks but that's not the case. Any loss on a rental can only be used against gains on another rental. You dont need to worry about this until you sell and even then it wont matter unless you buy another rental.

Other items your not thinking about are incidental costs. I like to drop off "gifts" for my tenants. Can be a few bottles of booze. A night out. Perhaps it's a gift celebrating Christmas or a religious holiday of sorts.

Cant forget other expenses like phone/vehicle.. your accountant can let you know how that all works. You can also hire a repair guy who happens to be a family member to handle the "repairs". Write off expenses of the house sitting empty before it was rented.

You need to get creative to help out the negative cash flow. You shouldnt be a cheap bastard and do your taxes on your own. A good accountant wont cost much and will make sure your maximizing your tax return.

[arcticcat522]

Yep, you can only deduct the interest. Not the mortgage principal. Also, I like to be sure my deductions aren't way more than the income. Not sure if the CRA look, but if there is a small income, I think there is less of a chance of being audited. I was once told if you show a loss for more than 3 years, it can trigger someone to start looking a little more closely. Not sure if there is any merit to it though.

[gwill]

I was told you cant claim a loss forever but if theres a legitimate loss then how long can it go? I'm sure this will factor into an audit at some point so keep all your receipts.

There are always alot of variables hence why you shouldnt do this on your own..

I throw shit at my accountant and let him decide what I can and cant do.

[arcticcat522]

I imagine the above to be true, but when you say "writing everything off in your existing house" if you did get audited, it may be hard to justify convincingly some of the items. Not impossible, but maybe. I do my taxes myself and don't find it too difficult. Curious if an accountant would find some other returns for me. I also don't claim anything for vehicle expenses, just seems like too much work to track. Not a sword I want to fall on if I get audited. Has anyone been through an audit?

Question about if you "hire" someone, how much is that looked at? Is a business number needed?

[ExtraSlow]

The mileage is easy to track. Google map the dist stance from your home or office, and just keep a tally of the number of trips.

[jwslam]

Questions:
1. I guess my old place is now an investment asset. How do I determine the value of it at the time of transferring it into a rental? I think I want to have it with a higher value (as close to the 345k I originally paid as possible) so that if I sell in the future, cap gains would be lower. Assessed value is horrible being 285k so do not want to use that if I can avoid it
-Pay for an appraisal of the value on Mar1/19. It'll differ from the July1/18 value that the city gave you.
2. What can I track as costs? I am thinking:
- mortgage (do I need to split up between principal vs interest? Yes. Only interest is an expense.)
- prop tax
- condo fee
- landlord insurance
- maintenance costs such as furnace cleaning?
- improvements (I.e. I am replacing a window at the unit next month) You need to look at how things depreciate over time for capital vs current.
https://turbotax.intuit.ca/tips/rental-property-expenses-current-or-capital-6379
https://turbotax.intuit.ca/tips/dos-and-donts-cca-for-rental-property-explained-6377
3. Since it is negative cash flow, does this reduce my tax liabilities and if so, would it be against my earned income or would it be against capital gains/investment income buckets? No. Negative cashflow does not equal no income. The income (due to paying principal on mortgage) will be counted as income (not cap gain)


The mileage is easy to track. Google map the dist stance from your home or office, and just keep a tally of the number of trips.
Be careful on this if you only have 1. "You cannot deduct motor vehicle expenses you incur to collect rents. These are personal expenses."
https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/rental-income/completing-form-t776-statement-real-estate-rentals/rental-expenses-you-deduct/motor-vehicle-expenses.html

[gwill]

I imagine the above to be true, but when you say "writing everything off in your existing house" if you did get audited, it may be hard to justify convincingly some of the items. Not impossible, but maybe. I do my taxes myself and don't find it too difficult. Curious if an accountant would find some other returns for me. I also don't claim anything for vehicle expenses, just seems like too much work to track. Not a sword I want to fall on if I get audited. Has anyone been through an audit?

Question about if you "hire" someone, how much is that looked at? Is a business number needed?

Why would things be hard to justify? If you bought paint or tools or equipment why wouldnt it be for your rental??

A business number isnt needed. Until you get to 3 or more rentals is the rule of thumb I was told.

[gwill]

On the topic of getting an appraisal I'd chat with someone on if that's needed. For example if your not selling for a while then it's not needed. Also if you plan to never get another rental property then the appraisal is not needed.

Your loss can only be applied to other real estate gains so you should be asking yourself what is your plan in the next 5 years. Dont spend money you dont need to.

[arcticcat522]

Why would things be hard to justify? If you bought paint or tools or equipment why wouldnt it be for your rental??

A business number isnt needed. Until you get to 3 or more rentals is the rule of thumb I was told.

Completely hypothetical. You buy paint for the house you live in, and pay a painting contractor to paint the rental. Stuff like that. Some stuff could be a hard sell to a potential auditor.

[sabad66]

You should be writing everything off in your existing house as a tax deduction. Any tools. Paint. lawn mower. Literally mostly anything you buy as an expense on your house could be explained as an expense for your rental.

this is good to know. will definitely keep track of any new tools i buy as a rental expense (within reason)



Your losses arent put against gains in investments. You would put it against your income.

I assumed if I sold one of my investment properties at a loss that it would counter gains in stocks but that's not the case. Any loss on a rental can only be used against gains on another rental. You dont need to worry about this until you sell and even then it wont matter unless you buy another rental.

interesting.... so rental property is essentially its own new "bucket" for income for tax purposes? So employment income is one, capital gains is another, rental properties is a separate bucket?



Other items your not thinking about are incidental costs. I like to drop off "gifts" for my tenants. Can be a few bottles of booze. A night out. Perhaps it's a gift celebrating Christmas or a religious holiday of sorts.

Cant forget other expenses like phone/vehicle.. your accountant can let you know how that all works. You can also hire a repair guy who happens to be a family member to handle the "repairs".
my rental and new residence are 3 blocks away so don't want to mess around with vehicle expenses and increase risk of audit. phone... what is a reasonable % of my monthly phone bill to say is an expense for being a landlord? 25%?



Write off expenses of the house sitting empty before it was rented.

this is a good one i didn't think of. I moved into my new place Dec 19, 2018 so could i use the last 12 days of December being vacant as a cost as part of my 2018 tax return? i.e. the mortgage interest, prop tax, utility bill, condo fee, all prorated for 12 days out of 31 in december?



You need to get creative to help out the negative cash flow. You shouldnt be a cheap bastard and do your taxes on your own. A good accountant wont cost much and will make sure your maximizing your tax return.
i'm generally pretty savvy with taxes so i do want to give it an honest attempt before i hire an accountant. that said, do you mind me asking how much your accountant charges you and a recommendation on one? you can PM me if you want

[triplep]

On the topic of getting an appraisal I'd chat with someone on if that's needed. For example if your not selling for a while then it's not needed. Also if you plan to never get another rental property then the appraisal is not needed.

Your loss can only be applied to other real estate gains so you should be asking yourself what is your plan in the next 5 years. Dont spend money you dont need to.

Yes it is needed. He had a change in us, depending on when he decides to do this (Dec 2018 or 2019) he will need to report this deemed disposition on his personal tax return as it was his principal residence. Gone are the days that you didn't need to report such things. But when he does report it, he will need to justify the values he came up with, easiest way to do it is get an appraisal done. There are other ways, but it might be hard to justify it and it would only cost $300 approximately to get the appraisal done. In addition, when he does decide to sell it, he will be calculating his gain/loss from the date he changed it to a rental property.

Also, if he doesn't report the change in use and CRA finds out, the penalties for not reporting this type of transaction can be significant.

[jwslam]

Write off expenses of the house sitting empty before it was rented.
I wouldn't unless you could prove you were looking for a renter during that period, which based on your OP you were not.

[lasimmon]

Claiming your phone use? 25%? I think I would talk to my landlord once or twice a year.

[Strider]

Semi-related question, so I'll piggyback on OP's thread...

I bought a house late 2017, rented it out for a few months in 2018 before tearing it down to build our future primary residence. Obviously appraisal value will be much higher than the original house when it's finished, but probably roughly equivalent to the purchase price plus build cost. How do I report value in this case?

[gwill]

I wouldn't unless you could prove you were looking for a renter during that period, which based on your OP you were not.

In this market people are actively renting and trying to sell at the same time so it's an easy cost to justify that it sat empty for a while. Seems his place wasnt empty for long so it doesnt necessarily matter much in this case. Thought he had it listed for months with it sitting empty.

[sabad66]

Yes it is needed. He had a change in us, depending on when he decides to do this (Dec 2018 or 2019) he will need to report this deemed disposition on his personal tax return as it was his principal residence. Gone are the days that you didn't need to report such things. But when he does report it, he will need to justify the values he came up with, easiest way to do it is get an appraisal done. There are other ways, but it might be hard to justify it and it would only cost $300 approximately to get the appraisal done. In addition, when he does decide to sell it, he will be calculating his gain/loss from the date he changed it to a rental property.

Also, if he doesn't report the change in use and CRA finds out, the penalties for not reporting this type of transaction can be significant.

how do you report change in use? is there a specific form as part of the tax return?

[triplep]

how do you report change in use? is there a specific form as part of the tax return?

https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/federal-government-budgets/budget-2016-growing-middle-class/reporting-sale-your-principal-residence-individuals.html

[gwill]

this is good to know. will definitely keep track of any new tools i buy as a rental expense (within reason)


interesting.... so rental property is essentially its own new "bucket" for income for tax purposes? So employment income is one, capital gains is another, rental properties is a separate bucket?


my rental and new residence are 3 blocks away so don't want to mess around with vehicle expenses and increase risk of audit. phone... what is a reasonable % of my monthly phone bill to say is an expense for being a landlord? 25%?


this is a good one i didn't think of. I moved into my new place Dec 19, 2018 so could i use the last 12 days of December being vacant as a cost as part of my 2018 tax return? i.e. the mortgage interest, prop tax, utility bill, condo fee, all prorated for 12 days out of 31 in december?


i'm generally pretty savvy with taxes so i do want to give it an honest attempt before i hire an accountant. that said, do you mind me asking how much your accountant charges you and a recommendation on one? you can PM me if you want


how do you report change in use? is there a specific form as part of the tax return?

I would meet with an accountant close by to you to get direct answers on the many variables you have. Your consult will be free. You'll be pleasantly surprised that they can take care of your taxes for a very reasonable rate.

As much as we can all provide advice and tips you should be listening to an accountant for what sort of write offs would be deemed acceptable based on how close you live to your rental.

You may be told not to write off certain things based on your close proximity. I'm also not sure you need an appraisal.. I know I never got one of my first rental but the rules have definitely changed from then.

A big expense that wasnt brought up was how much time you spent at the rental property showing it. Did you pay for listings?? How about travel time??

You have nothing to lose by sitting with a professional on a free consult.

[triplep]

I would meet with an accountant close by to you to get direct answers on the many variables you have. Your consult will be free. You'll be pleasantly surprised that they can take care of your taxes for a very reasonable rate.

As much as we can all provide advice and tips you should be listening to an accountant for what sort of write offs would be deemed acceptable based on how close you live to your rental.

You may be told not to write off certain things based on your close proximity. I'm also not sure you need an appraisal.. I know I never got one of my first rental but the rules have definitely changed from then.

A big expense that wasnt brought up was how much time you spent at the rental property showing it. Did you pay for listings?? How about travel time??

You have nothing to lose by sitting with a professional on a free consult.

I am sorry, but you should not be giving out advise on this topic. Basically you have done the following:

- Told the op to commit tax fraud by claiming expenses that don't pertain to the property,
- Told everyone else that your accountant helps you commit this tax fraud,
- Told him you still don't think he needs an appraisal, even though he clearly does since it will help him defend his change in use price, and then admit to not knowing anything about this since the rules have changed (the rules haven't changed, they have always been in place, but it has been CRA's administrative policy to not care about this till 2017),
- Then tell him to potentially claim some more bogus expenses
- Then back track on everything you said and tell him he should see an accountant

Also, just an FYI, when you decide to sell your property, you will need to come up with a value of what you "purchased" it for from yourself. If you don't have support for it (which the appraisal would provide) good luck defending your position should CRA ever audit you.

[jwslam]

In this market people are actively renting and trying to sell at the same time so it's an easy cost to justify that it sat empty for a while. Seems his place wasnt empty for long so it doesnt necessarily matter much in this case. Thought he had it listed for months with it sitting empty.
My understanding is that he had it listed for sale while it was empty, not listed for rent.

[gwill]

triple- I should have been more politically correct on some wording but the fact remains new landlords have a lot of overlap on items theyll buy for their rentals that they can possibly use elsewhere.

For example at some point the OP will start receiving calls about plugged toilets, problems with heat or other general issues. He can be prepared and buy equipment in advance or be stuck without the tools during an emergency late at night. At some point he wont be in the city to help his tenants and will need family checking in on things for him.

On the topic of an accountant you'll notice the first post I said speak with an accountant and yes I said that again later on. I'm happy to leave things to the experts as everyones situation is different.

[Xtrema]

Also, just an FYI, when you decide to sell your property, you will need to come up with a value of what you "purchased" it for from yourself. If you don't have support for it (which the appraisal would provide) good luck defending your position should CRA ever audit you.

Now the question begs if reappraisal is helping since it's worth less than when OP bought the place. He can always tell CRA the original 2015 purchase price when he sells it, reappraisal to today's lower value will trigger cap gain when he sells it for more down the road, even if OP only recover what he paid for.


jwslam covers most things, and gwill's tips are ok within reason.

Also OP, if you have $500 neg cash flow but if your principle portion of mortgage payment is over $500, you still have income. And given you have a day job, it'll be taxed at top rate.

[sabad66]

https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/federal-government-budgets/budget-2016-growing-middle-class/reporting-sale-your-principal-residence-individuals.html

i have come across this before but thought it was only for a true sale. Now that i read into the link you provided more, it does make sense that this applies for changing use too.

[sabad66]

Now the question begs if reappraisal is helping since it's worth less than when OP bought the place. He can always tell CRA the original 2015 purchase price when he sells it, reappraisal to today's lower value will trigger cap gain when he sells it for more down the road, even if OP only recover what he paid for.


this was my biggest concern. assuming a recovery in the market, i'm basically setting myself up for a big capital gain depending on what i use for the current value. Ideally i would like to just use my purchase price in 2015 as the value but not sure if that will fly. ultimately it's not going to be a crazy gain like Vancouver/Toronto markets so maybe i'll be able to fly under the radar from CRA.



Also OP, if you have $500 neg cash flow but if your principle portion of mortgage payment is over $500, you still have income. And given you have a day job, it'll be taxed at top rate.
yeah realized this after jwslam's post. it's about 900 principle so i guess i'm "earning" around 400 extra a month. that kinda sucks but oh well, not much i can do about it at this point.

[Xtrema]

yeah realized this after jwslam's post. it's about 900 principle so i guess i'm "earning" around 400 extra a month. that kinda sucks but oh well, not much i can do about it at this point.

So yeah, unless you have some room in RRSP to offset that $400, you owe CRA another $200/month when you file.

This is why I set rent at less than market to get the best applicants. I can subsidize it as long as I still have a day job. You are giving 1/2 to CRA anyway, may as well try to get the best clients you can for less trouble.