Rental Property Income Taxes and Deductions

As tax season is coming up, I've had a few readers email me about how income taxes are calculated with investment rental properties.  It's actually a pretty basic calculation, with your total NET rental income added to your regular income throughout the year.  The basic formula works out like this:

Total Rental Income – Expenses = Net Rental Income

Total Rental Income is self explanatory, but what is considered an expense?   Listed below are the expenses that are tax deductible:

  • Mortgage Interest (from your annual statement)
  • Property Taxes
  • Insurance
  • Maintenance/upgrades
  • Property Management
  • Utility bills (if you include them in the rent)
  • Office supplies
  • Car (there are exceptions)
  • Internet connection, telephone, cell phone (portion used for business)

For example, my rental property brought in around $10,000 in rent last year, with expenses listed above totaling around $8000.  In my case, $2000 was added to taxable income for the year.  At the 40% tax bracket, I would pay $800 in taxes for the year. 

What if I had a loss?  No problem, this amount is subtracted from your other sources of income that are taxable for the year. So say that I had a $2000 loss instead of a gain. Providing that I paid in taxes from other income sources throughout the year, I would get back an extra $800 during tax refund season.     

What if you live in a 2 unit home and you live in one of them?  In this case, you can still deduct mortgage interest and property taxes, but only a percentage of it.  The percentage depends on how much space you have rented relative to the size of the building.

There you have it, a basic explanation of how rental property income tax is calculated.  Please note that I'm not a tax professional so take the information above as a primer for your own research.  I would recommend that you contact a tax professional before calculating your deductions.

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FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.
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nobleea
5 years ago

I thought it had to go on the person who logically would have provided the funds for purchase? Or has to be split 50/50 in a marital situation, regardless of who you want to claim it?

Ed Rempel
5 years ago

Hi Teddy,

It’s probably best for you to show the rental property on your spouse’s tax return, since he is the lower taxable income. There will likely (hopefully) be taxable income over the years, so your spouse would pay less tax.

The taxable income of rental properties are usually higher than the cash income, since the principal portion of the mortgage payment is not deductible. Even if it is a breakeven (perhaps if you claim depreciation on the building), there should eventually be a capital gain on sale.

Net rent is fully taxable (unlike stock market income), so the tax could be quite a bit over the years.

It’s usually a good idea to keep a rental property fully leveraged. Pay the mortgage down as slowly as possible. If you use the Cash Dam to keep the rental property debt high and pay your home mortgage more quickly, you can minimize the tax on net rent.

You can still buy the property in joint names for estate planning purposes (if that makes sense in you case), but then show all the income on your spouse’s return.

Ed

Teddy8085
5 years ago

Looking at buying a rental property. I am a high income earner, and my common-law spouse is a lower income earner. Would it be beneficial to put the property in both our names, his name (lower income earner), or mine (higher income earner)? The initial purchase would have some costs around $5000 for repairs/maintenance. After that, we don’t expect to see a loss, but also not a large profit as this is only 1 small rental property. There would be a small mortgage that we would carry and pay with the rental income.

Shaw
6 years ago

Hi, I’m a little confused on the “The percentage depends on how much space you have rented relative to the size of the building.” part.

Let’s say you have a roommate who you rented one room to, but he also have access to the common areas – living room, kitchen, washroom; then do I only get to deduct mortgage relative to the size of that one single room vs the single room + half of the common area?

The latter arrangement seems much more fair.

Dr. Philosophy
6 years ago

@ Candy —
It depends on what sense of ‘can’ you are working with. Of course you can in a sense write down whatever the heck you want on your tax return. No one will stop you.
On the other hand, I suspect you mean “Will I be able to make a claim for expenses when I don’t have any shred of evidence that I paid, without bad consequences”. I think you can see pretty clearly that the answer to that is “no”.

Dr. Philosophy
6 years ago

@ Oilrental —
I suspect it would be considered income if the cash received is not equity. Getting a cash back mortgage is a way to make money. Just like rewards points are a form of income if they are ‘earned’ on business expenses.

Dr. Philosophy
6 years ago

@ Mohan —
Step 1: Find every shred of documentation you have.
Step 2: Go to a tax preparer.

Mohan
6 years ago

Hi
Iam new to this. I have rented my condo last year. I get appxly 1500 rent, i pay 1000 mortagage 690 condo maintenace fee, 2000 property taxes.
How do i calculate net rental income ?

Oilrental
6 years ago

There was a question “Mitch” asked above back in 2008 but I don’t see a response to it and I’m curious to the answer.

“Looking at renewing the mortgage on a rental. If I were to apply for a cashback mortgage, would CRA deem the cashback portion as income?”

Thanks!

candy
6 years ago

What happens if you hire someone to do snow removal but they want paid in cash. My understNding is that they are not going to claim it so neother can I right?