With rental housing in short supply and fetching high rental rates in Victoria’s Capital Regional District, some people may be considering owning an investment property.
Sharlane Bailey, Owner of Canwest Accounting, says her exceptional team of accountants and bookkeepers are often called upon to help these investment property owners at tax time. Unfortunately, many clients are surprised by the tax implications they can face, and she strongly advises those considering owning investment properties speak with an accountant first, so they can weigh their options carefully.
Annual Taxation
While landlords need to claim the rent they earn as income on their annual tax return, they can also write off the following expenses:
- Mortgage interest
- Maintenance and repairs
- Renovations
- Property taxes
- Strata fees
- Property management fees
- Advertising expenses
- Utilities
- Insurance
Changing Use of a Home
Some people who find themselves owning an investment property may have decided to keep their condo when upgrading to a larger home, or on the other end of the spectrum, they may be holding onto their house as a rental property when downsizing to a smaller home. In other cases, two halves of a couple may each own a home and decide to rent out one while living in the other.
In these cases, where a primary residence changes usage to become a rental property, Bailey says it is important that homeowners have it appraised the day they move out. While they may have originally paid $200,000 for the home, it might now be appraised at $350,000. The appraised value will be considered the “cost” of the property. If the owner were to move back into the property, it would need to be reappraised and if at that time it is worth $400,000, they would need to pay capital gains tax on 50% of the increase in value, in this case on $25,000. The taxation rate will depend on your annual income. Capital gains tax also applies if you sell the rental property at a higher rate than the “cost” of the property.
“It surprises a lot of people that they need to pay capital gains tax on the home if they decide to move back in after having rented it out for a while,” said Bailey.
Purchasing an Investment Property
In a lot of cases, people will purchase a property as an investment. The government has made it much more difficult for those planning to live in and quickly flip a home to get out of paying capital gains. Since 2017, Canada Revenue Agency (CRA) has started tracking on income tax returns whether Canadians have disposed of a principal residence during the tax year and you have to claim how much it sold for. In these cases, the investors will have to pay capital gains on 50% of the net profit. Since the taxation rate is based on your overall income for the year, Bailey strongly recommends against selling multiple investment properties in one year, particularly if they have increased in value. That can result in a hefty tax bill.
If you have any other questions about taxation of rental properties, please call to make an appointment or drop in at either the Victoria or Langford locations of Canwest Accounting.
DISCLAIMER
The suggestions and advice provided by Canwest Accounting should not be relied upon in place of professional advice. You are responsible for checking the accuracy of relevant facts and opinions provided.
