Posted on January 31st, 2020 by Don Knechtel in Domestic Tax, General Business

Property Rentals as a Real Estate Investment – Advantages and Considerations

Picture of townhomes rentals in Toronto

In this day and age when a good segment of the market are renting their homes, it may be a good time to consider real estate as an investment option.  In this article we will look at some of the advantages of real estate investment, as well as, the income tax considerations.

Investment advantages

Rental income provides steady cash flow.  This cash flow, when starting out can be used to fund the costs with respect to the borrowings used to acquire the real estate.  Once the property is paid off the cash flow will be able to fund other needs.  Rental income can be a good way to fund a portion of your retirement.  Unlike an RRSP, as long as you continue to own the real estate, the cash flow will continue.

Owning a rental property can provide a sense of security because of the property’s appreciation in value over time. This means that your property’s value is most likely going to increase because land and buildings are appreciating assets. With that said, however, there is no guarantee the value will increase indefinitely. That is why it is always recommended to get the input of a real estate professional before purchasing a property.

The benefits of investing in real estate include your tenants as well. Simply put, the rental income you receive each month should be enough to cover your expenses, including your mortgage payments. Essentially, your tenant is actually the one paying your mortgage. That is why it is important to find good tenants and to be a good landlord, to avoid or mitigate the negative repercussions of vacancy.

You need to recognize that real estate investment is not a short-term investment plan.  Real estate may not increase significantly in the short run and there may be years in which its value actually goes down but over a twenty to thirty year period your property will be worth significantly more.

Taxation consideration

The purchase price of the property including acquisition costs, such as legal and land transfer tax, forms your tax cost.  This is the basis for determining your future capital gain when you sell the property.  In addition, if you have to make significant repairs to the property before you lease the property to your first tenants, those costs will also be included in your tax cost.

Rental expenses that can be deducted against rental income include advertising, utilities, mortgage and loan interest, insurance, property management fees, property taxes, condominium fees, as well as, repairs and maintenance.  Certain travel and vehicle expenses may also be deductible, depending on the circumstances. 

In addition, you may choose to claim capital cost allowance (CCA) (depreciation) as prescribed under the Income Tax Act to reduce your net rental income that you have to report on your tax return.  This is a yearly elective deduction.  However, you cannot create or increase a loss from your rental activities with CCA.  In the future, when you sell your property for more than its cost, any CCA deductions will be brought back into income.

If you own a rental property or are considering investing in a rental property and have additional questions, please contact a DJB tax specialist.  We are happy to help walk you through the advantages and tax considerations.

About the Author

Don KnechtelPartner | CPA, CA

Don has over 25 years practicing in the area of taxation for both individual and corporate clients, including estate tax, corporate reorganizations, estate planning, and succession planning.
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