Tax Tips - Top 10 Expenses as a Real Estate Investor
You would be surprised to know how many times Realtors get asked about accounting questions through day-to-day interactions with clients. The two most common questions from clients are the following:
1) Can I expense this cost that’s related to my real estate investment property?
2) Should I incorporate as a real estate investor?
Full Disclosure – Typically, you should not take a Realtor’s word on accounting advice but the PPTO Team is unique in the sense that we can lean on a Chartered Accountant who is directly on our team to answer questions like the ones above, plus we are connected with highly qualified tax accountants on our extended team.
However, despite the points of consideration for expenses in presented in this tax tips guide, it should be noted that everyone’s situation is different and there could be further stipulations attached to the following points. We suggest that you read this guide for the purposes of information gathering and consideration only. We are happy to help answer any questions you may have to the best of our abilities, but for more formal tax advice, please consult a tax accountant.
The Top 10 – Expenses help offset rental income from your investment property, so if you incur more expenses and keep track of them, you will be able to lower the amount of taxes owing to the CRA on your investment property. So without further adieu, here are the top 10 expenses that are available to you as a real estate investor.
#1 – Write Off Your Investment Property’s Interest Expenses.
This is probably the tax tip that has the biggest impact. Depending on how you financed your investment property, you may have standard mortgage interest expenses, line of credit interest expenses, etc.
You can write off your mortgage interest, your Home Equity Line of Credit (HELOC) interest and any other interest you may have incurred as a direct result of your investment property.
To write off your mortgage interest and your HELOC interest, you must keep very clear documentation in case you are asked to prove that the interest is directly linked to an investment property. An example of what not to do is writing off line of credit interest on the portion used to fund your family vacation. That’s a no-no with the CRA, and you’ll be in trouble for doing so. Keep anything you do with interest or general money related to your real estate transactions in a separate account, even if that means you have to pay some bank fees. This will save you the many headaches later trying to sort through your personal vs investment expenses, line-by-line.
#2 – Condo Fees & Property Management
If you own a condo investment property, remember to write off the condominum fees when you file your taxes. For those who use any property management services (i.e., unit cleaning, tenant filling, maintenance, etc.), keep your invoices because these costs are eligible for tax write-offs as well. You will need to maintain proper records and evidence to prove that these costs were incurred and paid by you during the tax year.
#3 – Legal Fees and Accounting Fees
You will most definitely incur legal fees to close your investment property, as this is required for any real estate transaction. However, you may also incur legal fees if you need to evict your tenant or file other notices. Regardless, if the legal fees are directly related to your investment property, then these costs are also eligible expenses.
If you consult a tax accountant for advice on your investment property or properties, then you may incur consulting fees. If you hire an accountant to file your property’s taxes, then you will also have tax filing fees. Any accounting fees related to your investment property are eligible expenses for tax purposes.
#4 – Property Taxes
No matter where your property is located, you can be sure that you will have to remit property taxes. The tax rate varies between municipalities, but all property taxes related to your investment property can be expensed.
If you’re renting out a portion of your home to a tenant, then you can expense the portion of the property tax that is directly related to your tenant. For instance, if your tenant occupies approximately 500 square feet of your 1,500 square foot property, then you can expense about 33% of your tax bill (500/1500 = 33%).
In any case, remember to keep those bills from the city!
#5 – Repairs & Maintenance
This one can be a bit confusing, so it’s best that if you have a specific expenditure that you’re unsure about, please consult with a tax accountant. Generally, any repairs that are deemed as “upkeep” for your investment property can be expensed. These are repairs such as appliance repairs, general handyman repairs and even cleaning. They are all deemed as regular and routine in nature.
On the other hand, any repairs that are deemed to be “capital” in nature will be subject to different rules. These would be defined as expenses that are incurred to extend the useful life of your property, or in other words, the work done adds some sort of long-term benefit to the rental property. Some examples of such expenses that are capital in nature include kitchen renovations or putting in a brand new roof. You won’t be able to claim 100% write-off on these expenses all upfront, but rather, think of these expenses as being written off little by little over time – in more technical terms, you are amortizing the capital expense over a specified number of periods.
PRO TIP: If paperwork isn’t your thing, you can try using an app called Expensify or Everlance to help keep your documents organized. These apps allow you to simply take a picture of your receipt and leave it on the cloud. You can then easily sort through your expenses when tax time comes.
#6 – Insurance
You will always need fire insurance on your rental property in order to get a mortgage and guess what – this expense is eligible for a tax write-off. Further, there are also specialized insurance policies for short-term rentals, rental protection, vacancy protection and damage protection that will cost you a little more but could give you peace of mind, not to mention these extra expenses would be an additional tax write-off. As long as the insurance is directly related to your investment property, then the expense can be used to help offset your rental income.
#7 – Utilities
If you are providing an all-inclusive unit for your tenants, whether that be long-term or short-term, you can write off the utility bill. Even if you are not providing an all-inclusive unit for your tenants, any other utility expenses incurred as a result of your tenant can be written off. This includes water, gas, hydro (electricity, not water), internet bill, cable bill and telephone bills. As long as your tenant is using these utilities and you are paying for it, then all of these constitute as eligible expenses for tax purposes.
#8 – Commissions
Realtors are typically brought on by a seller in order to effectively sell their home for top dollar, or to help a buyer find a tenant. Realtors charge a commission for their services to sell a home and to lease a property. As such, any commissions that you pay to sell or lease your investment property can be written off on your tax return as well.
#9 – Advertising
Contrary to #8 above, if you’re not hiring a Realtor to help sell your investment property or to lease it out, then you would be opting to conduct these activities by yourself. Usually, people who like to do these transactions themselves often advertise their property on classified ads such as Kijiji, newspaper ads, Facebook, etc. Any such costs related to advertising the sale or lease of your property are eligible expenses for tax purposes.
#10 – Travel Expenses
Your investment property may be located conveniently in Toronto, the Greater Horseshoe Area, or somewhere beyond. You may need to visit your property to get it ready for lease, screen tenants, resolve tenant issues, regular maintenance, etc. Regardless of where your property may be or why you may be visiting, any travel directly related to your investment property can be written off for tax purposes. This includes gas, tolls, etc. used for travel to your investment property.
Everlance is a handy tool that you can use to automatically track your mileage and distance travelled. Remember that if you’re claiming kilometres travelled for the purposes of your investment property, you will need to be able to clearly demonstrate the specific trips that you took. Keeping organized and having clear documentation will go a long way in helping you claim legitimate expenses at tax time.
To Incorporate or Not?
Now for the second question, should you incorporate as a real estate investor? There’s really no simple, one-size-fits-all answer to this question. It truly is a fully loaded question that is very case specific, and for this reason, you should definitely talk to a tax accountant for more formal advice. If you need a good real estate investment-specific tax accountant, we would be more than happy to connect you to one.
Generally speaking though, the answer is no, you don’t need to incorporate because qualifying for a mortgage in a corporation would be more difficult and it requires a higher down payment. Furthermore, your tax efficiencies must outweigh the accounting and legal costs associated with incorporation. If you’re self-employed, then perhaps incorporation may be a worthwhile option to explore. Either way, speak to a tax accountant about your specific needs.
The Wrap – As mentioned at the beginning of this guide, all of the points above are meant to offer guidance on what you can and cannot expense as a real estate investor. From a top level, there are a number of benefits and liberties as a real estate investor. If you’re looking to get started with your first investment property, please reach out to the PPTO Team.
Your Move. Your Future.