9 Great tax deductions for income properties
9 Great tax deductions for income properties
Tax season is just about over for everyone and I was able to get a pretty nice return thanks to my tax deductions for income properties. You may know by now that I have two income properties. If not, go and read about my first one which became an income property by accident. When you’re done there you can check out my search for a purpose bought income property. Go ahead! I’ll wait right here!
Why so many income properties?
Well besides the fact they can make you tons money in four different ways, any accountant (always helps to check with an accountant if you’re going this route, they can save you lots of money!) could tell you all about the tax deductions for income properties.
For those of you that are unaware on how tax deductions work I’ll try to summarize it as best I can: Deductions are expenses for your business, anything you bought to run your business and what they do is reduce the total value of your income that you pay taxes on. Simply put if you bring in $10,000 a year in rent with no deductions claimed and your marginal tax rate is 25% you’re going to pay $2500 in taxes. Now if you have $5000 in tax deductions, your income is now $5000/year and you’ll only pay $1250 in taxes.
Here are some of the most common tax deductions to owning an income property:
- Mortgage interest – The mortgage interest is tax deductible. You can save 2-5% a year on your monthly mortgage payments depending on the finance rate you’ve managed to receive. In the early years of owning these properties this can be a very large sum.
- Insurance – You need insurance on your property to protect you in worse case scenarios. This is considered an expense to your business and you won’t pay taxes on the value of these policies.
- Property taxes – Another deduction! Make sure you keep records of your tax statements from the town or municipality to ensure you have proof of the tax assessment.
- Repairs and renovations – In Canada these can be broken down into two different categories.
- Capital Expense – Capital expenses are generally improvements that increase the value of the property. For example, an addition like adding a garage or another bathroom/bedroom or other substantial renovations that would upgrade the quality of the property. These are usually handled different then regular expenses and you should talk to an accountant about the differences.
- Current Expense – Current expenses are the expenses you’d incur at regular intervals. Some examples of current expenses are small repairs, like leaky pipes or painting after a tenant moves out.
- Utilities – Do you pay the water bills? The electrical or gas bills? You won’t have to pay taxes on those either. Personally I like to have the tenants pay for these as they can vary throughout the year so I find it easier to manage my cash flow when I don’t have a lot of variable expenses.
- Travel – Do you own multiple properties? You can deduct part of your vehicle expenses from collecting rent, checking on the property, going to perform repairs, etc. If your property is in another area of the country you may need to fly there occasionally to inspect it or deal with some aspects of it, these expenses are also deductible in most cases.
- Home office – This can be an overlooked aspect of the deductions and a lot of people try to walk a fine line with it. If you have dedicated office space in your house, you use for searching out properties and keeping track of your finances you can deduct a portion of your home costs. By home costs I mean if you’re renting, a % of that rent can be deducted; if you have internet and phone bills, you can deduct a % of those. What percentage may depend on your usage and your country’s/state’s/province’s tax code so consult your accountant on this one.
- Management costs – Are you paying to advertise on the front page of Kijiji or Craigslist? That’s deductible! Are you providing rental incentives like a referral program for current tenants to refer friends and family? Good chance that’s also deductible!
If you’re paying anyone to basically do anything to your property, that’s an expense that’s deductible from your income. This includes property management, contractors doing repairs or maintenance, gardeners, pool care, lawyers, accountants, etc. If you’re paying them for your business that’s an expense.
- Depreciation – Depreciation is the allocation of the asset’s value over it’s lifetime. You’re able to deduct a certain % based on the appraised value of your property. This can often be one of the largest deductions but the caveat is that when you sell this property the depreciation is paid back on the gains of your property. This works slightly different between Canada and the USA, so check your regulations.
So there’s 9 tax deductions for income properties. A lot of these are actually applicable to any small business you may start. As with everything I post these are just for your information and to get your brain thinking about alternatives to the status quo on investing and how to utilize your money better. You’ll definitely want to consult with an accountant before claiming all of these on your taxes. Basically this is the reason I don’t do my own taxes anymore is because I want a professionals’ advice to ensure I’m deducting as much as I can to keep as much of my money in my pockets.