Top 10 tax deductions you shouldn’t miss as a real estate investor

hi everyone welcome to the real estate tax tips channel my name is cherry chen a chartered professional accountant located in ontario canada my mission is to become the google map for hardworking canadians seeking financial freedom today we're going to go through the top 10 tax deductions for real estate investor before i get started if you have not subscribed to our youtube channel make sure that you hit the subscribe button below or give us a thumbs up if you like the video if you have any questions um after watching this video make sure that you comment below ask the questions below and i'll personally get back to you now let's get started today we're going to talk about the top 10 tax deductions you should not miss as a real estate investor now let's get started with the first one number one is the general tax deduction rule what it means is that the income tax act in canada allows you to deduct any expenses all expenses all reasonable expenses that you incur for the purpose of earning business income or property income so what it means is that as long as you would be able to establish the cost and effect relationship between incurring the expense and earning the income you would be able to claim a deduction with certain exception and we're going to go through some of the exceptions later on okay let's use an example to explain for example if you're incurring mortgage expense for the purpose of earning rental income there is a direct cause and effect relationship without a mortgage interest expense you would not be able to earn the rental income or without the property tax expense you would not be able to earn the income that's where the cause and effect relationship comes in now to earn the income you have to also keep the receipts and documentation what it means is that if you think that you have a remote chance of deducting there is a remote chance for you to argue for the cause and effect relationship you should always keep the documentation keep the receipt without receipt there is no way that you would be able to stand in court for in front of cla to claim your deduction you need proof and documentation that's the number one general tax deduction rule number two going along with the same cause and effect relationship there are a bunch of very straightforward deductions for real estate investors this includes mortgage interest the property tax the utilities insurance your house insurance your rental property insurance the property management fees and everything you think it helps to earn rental income within reasons now these are all directly related to earning the particular rental income that you're you're earning and therefore the deduction is totally allowed and keep in mind make sure that you keep the receipts for all these expense mortgage interests you would need to keep the any mortgage statement property tax whether or not you pay by monthly installment or quarterly installment you have to keep the property tax bill annual property tax bill utilities again you have to keep all the utilities receipts on a monthly basis insurance you have your annual insurance policy you have to keep it to substantiate your claim property management fees that have all that also has to be kept um the invoice would have to be kept and anything essentially anything that you can remotely think that there is a cause and effect relationship make sure that you keep the documentation now i also want to bring this up at this point that make pure bank statement transactions as well as the visa statement transaction themselves they are not considered evidence to support your utilities claim or insurance claim or property management fees claim you actually need to keep the actual invoice on its own to support your claim number three you gotta earn your deduction i kept repeating myself and again and again it's so important to keep all the receipts and if the receipts faded and cia would not be able to see it it doesn't count so it has to be a legible receipt that you keep and cia already allow us to keep all the receipts in soft copy either in soft copy or hard copy if you have a document filing system either in paper format or in soft format make sure that you keep a copy of those receipts especially home depot or some of the news and entertainment expenses they are printed on those glossy slip that could easily fade over a couple of years so make sure you do keep legible copy of your receipts whether in soft copy or hard copy format the fourth deduction that people often miss is called finance charge what's considered finance charge like for example today if i go to home trust which is a b lender to borrow money i often have to pay a one percent lender fee i often have to pay my mortgage broker to help me set up the mortgage it doesn't happen all the time but sometimes it does happen depending on what you are investing and how you're qualifying for financing another example that i have is we are in the process of purchasing our office space and commercial lending often comes with financing charge as well so when i apply for my for my mortgage for my commercial condo bdc is asking for half a percent of lender fee so these are all the fees that are considered finance charge another example of finance charge is something called cmhc insurance mortgage insurance for real estate investors who are using more than who are borrowing more than 80 for their rental properties you typically are required to buy purchase these mortgage insurance products from either cmhc or genworth or another company that offers these mortgage insurance when you pay a significant amount of premium at the time of closing these insurance are being added to your mortgage amount so you're not really paying it until you're paying it as part of your mortgage over 25 to 30 years you're not paying it immediately all these fees are considered finance charge and you are eligible to deduct finance charge pretty much over five years so let's say you incur a finance charge or you pay your mortgage broker a commission of ten thousand dollars that could be amortized over five years as a deduction sometimes these finance charge is being paid at the time of closing as a one-time expense sometimes these finance charges such as the cmhc insurance mortgage insurance they are being added to the mortgage amount and you are repaying it over 25 years 30 years during the time of your financing and don't forget to pick it up at the closing document and amortize it over the next five years when you earn your rental income the fifth deduction people often miss is called line of credit interest a lot of real estate investors start investing by setting up a home equity line of credit against their primary residents because toronto real estate has appreciated substantially to tap into your appreciation the appreciation of your home you can set up a home equity line of credit with the bank and once you set that up you borrow against your home equity line of credit and use the fund for investment of course because you're borrowing the money from the bank you would incur the line of credit interest and the interest expense is deductible against earning rental income now the catch is that people often only have one line of credit against their home and sometimes you would use the same home equity line of credit for both investment purpose as well as personal purpose so once as soon as you mix the usage of the line of credit interest you have to parade the amount of line of credit interest for deduction only the business use portion or the portion that's used for the purpose of earning investment income rental income would be tax deductible the portion that you use you incur for personal use purpose would not be tax deductible okay number six um auto mileage so if you think about it you drive your vehicle to manage your properties and sometimes you do drive your vehicle to do repairs directly for your rental properties and this is the reason why if you go back to the general deductibility rule that we mentioned earlier you would logically you would also be able to deduct the auto expense that you incur for the purpose of managing your rental property so therefore you're allowed to deduct auto mileage or auto expense type of expense that you would be able to deduct that includes the following your guest receipts you need to keep the gas receipts as well your guest expense your insurance your license and registration um i would even deduct a fine if there is any speeding fine um if you have you lease a car the lead part of the lease payment would be deductible if you purchase a car part of the purchase price could also be deductible now the amount that could be deductible really depends on the business use of your vehicle so in essence you also need to keep a log book in terms of how much you are using your vehicle for the purpose of running your business or earning the rental income in relation to how much you drive the car so for example let's say in 2021 you drove to st catharines or hamilton my properties are in hamilton catherine's just to take care of your properties and you drove about 5 000 kilometers back and forth the whole time and through 2021 which is still a year of covet you rarely need to go out so let's say 10 000 kilometer is the total kilometer driven on your car all the perks so you have 5 000 driven for business purpose ten thousand kilometer driven for the all four all through the year so basically you would be eligible to deduct fifty percent of your lease payment fifty percent of your guests receives fifty percent of your maintenance and repairs 50 of your insurance license and registration they are all deductible but only up to 50 so that would be how you would be able to deduct auto mileage or auto expense against your rental portfolio like there are a couple of ways to keep track of the logbook um the first way to keep track of the logbook is by your phone easiest way to keep track of your auto lock you would be able to use an app called mile iq by no means i'm endorsing them i know a lot of my clients are using my iq to keep track of their auto mileage the downside of using it is that you have to log into the app regularly to make sure that you know which trip you are going which trip is for business and the which trip is for personal use so you do have to log in regularly now the second app that i would recommend a lot of my clients are using already is the quickbooks online app it comes in it builds in it has a built-in app to track the mileage as well so if you don't want the hassle you just want a sample auto lockbook you can always go back to my website in the link below and we would be able to provide you with a sample log book that you can use the seventh x type of expense is home office expense if you don't have any if you don't have any external office at an assigned designated office to run your rental portfolio you are eligible to claim home office expense to deduct against your rental properties now the challenge sometimes is that the judge does not agree necessarily with claiming home office expense they sometimes don't think that you would need the space to manage your properties that is one challenge regardless there is an income tax folio that talks about deducting home office expense against earning rental income for me i would still maximize my deduction claim it document it and if cia ever comes back to me i would always try to show them the income tax folio and then we'll then decide whether we want to proceed with court case or not but at this point for my clients i always recommend them to keep a bunch of documents to claim home office expense and these includes number one your all the expenses that you incur for your home so we mentioned it earlier all the expenses such as mortgage interest insurance insurance expense property taxes utilities internet i would always keep copies of all these receipts and on top of that you would also need to call you would also need to keep a copy of your floor plan for example if you have um you have a designated office space uh one room in the basement as your office you want to keep the floor plan for all three floors to show that you're you're using that one room in the basement as your home office as the designated area to manage your business now how much can you claim as home office expense deduction as a real estate investor well it goes back to your particular situation it it's typically based on the number of rooms or the square footage that you're using for managing your business so using an example quick example let's say you have a house and it's a thousand square feet and if you have uh you have a designated room which is about a hundred square feet you would then claim ten percent of your mortgage interest ten percent of your utilities ten percent of your internet 10 of basically majority of the expenses related to running your house um for as a deduction against your rental property just as a word of caution when you claim home office expense typically if you only use your home primarily as your primary residence and there's only one room being used for managing your property typically it would not affect your claim on primary residence exemption however if you are renting your property out and you have one room designated as your your office as well and you're claiming a bunch of other stuff then that could potentially jeopardize your claim on primary residence exemption it may mean that it it may mean that you will have to pay capital gain tax so when we do home office expense deduction it really goes back to your particular situation you may or may not be able to claim it or we may not advise you to claim home office expense at all not because you're not eligible to do it it's just because if you're using your home office together with other news of your home and it may actually jeopardize the possibility to claim your the sale of your home as your primary residence so we are trying to stay on the right side of cla to make sure that we're doing the right thing okay the eighth deduction is membership and education so this is huge because there are a lot of real estate education or meetups or membership out there and the truth is a lot of people go through these programs educational program or membership events and they learn a bunch of things and then they go back to implement it and you if you apply the same general deductibility rule that i mentioned earlier you could see the cause and effect relationship between incurring the membership cost or getting educated to earning the rental income so to me it sounds like it should be something that should be deductible against your earning rental income so the problem of deducting membership and education expense is that sometimes the auditor the cra auditor does not look eye to eye with you regarding the cause and effect relationship incurring the expense and earning the income it's worse especially worse for real estate investors who get educated and wait and wait and wait and wait before they take action so sometimes some some people some of my clients would incur the expenses two years ago but they don't take action until two years later so in year one when they incur the expense i have nowhere to claim the expense uh i'm you're not earning any income so there is nothing to deduct the expense against now the year in year three when they start taking action they're making maybe a couple thousand dollar net rental income it's not possible for the accountant to argue that there is a cause and effect relationship and that's where the difficulty and challenge is coming in from now if you are incurring membership or education expense make sure you take actions documented why you are incurring the expense and how it helps you to earn the income it's hard for your accountant to deduct the expense if you don't have the case to support you between the cost and effect relationship the ninth deduction is called capital cost allowance now i did previously set up a capital cost allowance video if you want to click the link above you can always watch that capital cost allowance explanation in that particular video but for the purpose of rental deduction today i wanted to mention that you would be able to claim a portion of the wear and tear on your house as capital cost allowance if you purchase a house for 500 000 you can assign the whole thing as capital as the capital cost and cla or the income tax allows you to claim about four percent up to four percent of the building costs as capital cost allowance expense now this capital cost allowance thing that we're claiming is only applicable if you have a net rental income if you don't have net rental income you are not allowed to claim it uh the other rule about capital cost allowance is that if you you are only allowed to claim capital cost allowance to reduce your net rental income to zero you would not be able to claim capital cost allowance to create a loss now another special thing about capital cost allowance is that capital cost allowance is kind of like rsp so for those of you who are familiar with rrsp what it means is that the similar to rsp rsp the year that you contribute to rsp you don't pay the tax on the rrsp contribution amount so for capital cost allowance it's similar the year that you claim the capital cost allowance you don't have to pay tax on the net rental income the similar to rsp the year that you withdraw from the rsp you would have to report that rrsp withdrawal amount as your income capital cost allowance the year that you sell the property the capital cost allowance that you've claimed over the years would have to be taken into income the year that you sell the property so basically capital cost allowance is not a tax deduction per se but rather it is a tax deferral it's a lot of the time is still worthwhile to claim capital cost allowance but it also goes back to how you use your your property and what your plan is with the property okay the last tax deduction is repairs and maintenance now as all of you know rental properties operating rental properties are not really passive and a lot of the time you get late-night phone calls about i lock myself in the room um the toilet's not working or the there is a flood so all these things happen and if you have repairs and any repairs and maintenance on the property you're eligible to deduct the repairs and maintenance under the general deductibility rule now the reason why i mentioned repairs and maintenance and i call it l as a special deduction to mention in this video is because sometimes some of the repairs cla doesn't consider them as a repair expense sometimes they consider it as an improvement to the property and you have to add it to the cost of the building and you can claim those as part of your capital cost allowance not as a one-time expense now why is it so important well the reason why it's so important is because repairs expense is considered an expense deduction against your rental income when it is being added to the cost of the building when it is considered improvement it's being added to the capital cost built off your building that is being claimed as capital cost allowance which we mentioned before it is a tax deferral not a tax deduction you have whatever you claim throughout the years would have to be brought back to income the year that you sell the property so for anyone who is planning to do any renovation you want to be able to argue it as repairs not improvement to the property and that's the reason why there is a significant difference between calling it repairs and cap versus doing improvement now the second thing is so important is because these improvement that you made to the property is being added to the to the capital cost of the property and it can be deducted against your future proceeds but then the deduction if it is uh but then the capital gain that you earn on the property is only 50 percent taxable and therefore all these capital improvement that you've made is only 50 deductible whereas in the repair situation is 100 deductible and that's why naturally every tax payer out there would want to argue the expense as repaired repairs and maintenance instead of capital cost improvement now what are the rules around deciding whether an expense is considered repairs or improvement well just to give you an example one quick example is that if you are replacing the carpet old carpet with all hardwood floor that is an improvement that's black and white that would have to be capitalized and being added to the cost of the building now if you are replacing the black um black shingle roof with a metal roof that is also an upgrade and an upgrade is also considered capital improvement and therefore the metal roof replacement cost would have to be added to the cost of the building and it would be claimed as part of capital cost allowance and eventually ultimately being claimed against the sale price of your property now sometimes it's not black and white because whatever we do to the property in a way it could be considered as an improvement cia does have two rules as well to help us to determine isolated situation that has to be recorded the expenses would have to be recorded as capital costs one of the examples is that if you purchase an o house to get and all the expenses that you incur for the purpose to get the house ready for rent that expense whether or not it is as small as painting the house or replacing the light bulb those expenses should be capitalized as part of the capital cost because you know what you're buying and you're really just getting the house ready for rent and that period of expenses all that repairs are always considered capital costs another example is that if you are getting the house ready for sale you are incurring the expense for the purpose of selling the property then those expenses that you incur for the purpose of selling the property whether or not you you are painting refreshing the whole house to get it ready for sale cleaning the house to get it for sale or repairing the repairing the deck repairing the hardwood floor all these expenses that you incur for the purpose of getting the house ready for sale is also considered capitalized improvement and it has to be added to the cost of the building and deduct it as such so these are two exceptions now so one of the most commonly asked questions is that like what about i set up a legal basement suite is that considered repairs or capital improvement typically if you spend hundreds of thousands of dollars you would have to add it to the cost of the building and claim it as capital cost improvement because there was no legal secondary suite in the past and now you're putting one in so that is capital improvement now what are the tips of in terms of repair spending money on repairs well one thing that you need you can pay attention to is that the timing of the expense if you know that you have to replace the roof say when you purchase the property maybe don't replace the roof if you can drag it out for a year until you tenanted the property have tenants living there for a while and then you replace the rule typically the roof doesn't really come down the moment that you purchase it that's when you get to play around with timing and maximize your tax deduction so now that we've gone through the top 10 tax deductions for a real estate investor if you have any questions make sure that you comment below and make sure that you also subscribe to our youtube channel so then you can stay on top of the latest tags tips and if you like the video make sure you give us a thumbs up and share that with your friends so then youtube will be able to share that information to more people until next time thank you so much for watching you

Channel: RealEstateTaxTips

Views: 24,656

Keywords: Capital cost allowance, capital cost allowance, tax deduction, depreciation, canada, tax, real estate tax law, tax benefits of real estate investing, tax free real estate, tax on real estate, saving tax on real estate, CanadianInvesting​, CCA, taxdeduction, taxsaving, Tax writeoff, real estate tax deduction, real estate tax writeoff, real estate tax saving

Id: 7tcV_zVj7CE

Length: 26min 15sec (1575 seconds)

Published: Thu Nov 18 2021