You would be surprised to know how many times I get asked about accounting questions in my day-to-day life when I interact with clients. The two most common questions that I get from clients are the following:
1) Can I expense X (where X is some cost incurred)?
2) Should I incorporate?
So in today’s Insight Article, I’ll do my best to answer both questions for you. Let me preface this by saying that I am not a tax accountant, and even though my wife is a Chartered Accountant, it doesn’t mean you should take what I’m telling you as formal tax advice because everyone’s situation is different and there could be further stipulations attached to the following points. These are just the things that I have learned from my investing journey and talking with good tax accountants who are also investors. Consider this as heads up insight, and for you to consider in your real estate investing journey.
The Top Ten – So without further adieu, here are the top 10 things that you can write off as a real estate investor:
1) Interest – This is probably the biggest one. You can write off your mortgage interest, your Home Equity Line of Credit (HELOC) interest and essentially any interest you may have incurred as a result of investing in real estate. To write off your mortgage interest and your HELOC interest, you must keep very clear documents in case you are asked to prove that the interest is linked to an investment property. An example of what not to do is writing off HELOC 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 monies in real estate in a separate account, even if that means you have to pay some bank fees.
2) Property Management & Condo Fees – You can also write off any condo fees or costs associated with having a property manager to look after your property. Again, keep your invoices and statements to prove that you paid these fees. PRO TIP: If you’re bad with paperwork, use an app called Expensify or Everlance. You can just take a picture of your receipt and leave it on the cloud.
3) Accounting & Legal Fees – This one is fairly standard because any legal fees paid on closing or accounting fees you pay for taxes related to real estate investing can be expensed.
4) Property Taxes – Yes, you can write this off as well for investment properties. Keep those bills from the city!
5)Repairs & Maintenance – This one can be a little bit confusing but I will do my best to explain it. Any repairs that are deemed “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 (i.e., amortization of the capital expense).
6) Insurance – You will always need fire insurance on your rental property to get a mortgage and guess what – you can write this off! 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. All of these insurance costs can be written off as well.
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. This includes water, gas, hydro (electricity, not water, I know it’s confusing), internet bill and telephone bills.
8) Commissions – Any commissions that you pay to sell or lease your property can be written off on your tax return as well.
9) Advertising – If you opted to lease or sell your property on your own, you can write off any advertising costs associated with it such as classified ads on Kijiji, newspaper ads, Facebook ads, etc.
10) Travel Expenses – Any travelling related to the investment property can be written off. This includes gas for travelling to see your investment property. This is why I use Everlance because it tracks my mileage for me automatically.
To Incorporate or Not? Now for the second question, should you incorporate? This is a case-specific question, and for this one, you should definitely talk to a tax accountant. If you need a good real estate specific tax accountant, I would be more than happy to connect you to one. Generally speaking though, the answer is no 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 a non-T4 worker, then perhaps incorporation may be more worthwhile. Either way, speak to a tax accountant about your specific needs.
The Wrap – I hope this was helpful in providing you with some 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 me; my contacts will be below.
Until Next Time, Happy Real Estate-ing
Zhen
(416) 436 9436
Zhen@PrimePropertiesTO.com
