If someone owns a second property, what can they deduct? Can they deduct the cost of purchasing or renovations?
—Nicole
The types of expenses you can deduct for a second property
If you own a second property and use it to generate income — for example, by renting it out — many of the costs you incur can be deducted against that rental income. The Canada Revenue Agency (CRA) allows a range of deductible expenses for investment properties, including interest on loans, utilities, property taxes, repairs, insurance and certain professional fees.
Expenses fall into two main categories: current (or operating) expenses and capital expenses. Current expenses are costs you incur to keep the property in its ordinary condition and to operate it as a rental. Capital expenses are investments that improve the property, extend its useful life, or convert it to a different use. How an expense is classified affects when and how you can claim it for tax purposes.
Current vs. capital expenses
Current expenses are deductible in the year you incur them. Typical examples include routine repairs and maintenance, interest on the mortgage, property taxes, insurance premiums, advertising for tenants, and fees for property management, accounting or legal services. These are costs of running and maintaining the rental property and reduce your rental income in the year they are paid.
Capital expenses, on the other hand, are for improvements that increase the property’s value or extend its life — for example, a major renovation, adding an addition, or replacing a roof. You don’t deduct these costs in a single year; instead, they are added to the capital cost of the property and claimed over time through the capital cost allowance (CCA), the tax system’s version of depreciation.
The CRA allows you flexibility with CCA: you are not required to claim the full allowable amount every year. You may choose to claim any amount from zero up to the maximum permitted. That choice can be strategic. For example, if you expect a year with little or no taxable income, you might defer claiming CCA to avoid creating or increasing a recapture or to preserve future deductions.
Importantly, the purchase price of the property itself is not deductible against rental income. Instead, the purchase price forms part of your adjusted cost base and is taken into account when you sell the property. That cost affects the calculation of any capital gain or capital loss on sale.
Claiming a rental loss
It is possible to claim a rental loss if your allowable expenses exceed your rental income. A rental loss can often be applied against other sources of income, reducing your overall tax liability for the year. To do this properly, keep clear records and ensure each expense is reasonable, appropriately classified (current versus capital), and supported by receipts or invoices.
If the property is temporarily vacant, you can still claim certain maintenance and holding costs, but the CRA expects the property to be available for rent during that time. In other words, you must show that you were actively trying to rent the unit — for example, by advertising or listing it with a rental agent — to justify claiming expenses while income is not being received.
When in doubt about classification, valuation or timing of claims, consult a qualified tax professional. Small errors in how expenses are reported can lead to audits or adjustments later, and a planner or accountant can help you choose the most tax-efficient approach for your situation.
This column was written by Seun Adeyemi, CFP, CKA at True Wealth Advisors.
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