Rental property owners can typically deduct property taxes, insurance, interest, condo fees, repairs, utilities and other related costs. A rental property can even run at a loss allowing the taxpayer to claim deductions against their other sources of income.
Rental properties: Current vs capital expenses
There is a distinction between repairs and renovations for a rental property, Shawn. Repairs are referred to as current expenses, meaning they are deductible in the year incurred. Renovations are capital expenses that cannot be deducted immediately but can reduce your capital gain upon sale.
According to the Canada Revenue Agency:
A current expense is one that generally recurs after a short period. For example, the cost of painting the exterior of a wooden property is a current expense.
A capital expense generally gives a lasting benefit or advantage. For example, the cost of putting vinyl siding on the exterior walls of a wooden property is a capital expense.
The CRA provides guidelines for distinguishing between a current and capital expense, including:
- Does the expense provide a lasting benefit? If so, it is more likely to be a capital expense.
- Does the expense maintain or improve the property? If it is an improvement, it is more likely to be a capital expense.
- Is the expense for a part of the property or for a separate asset? If it is a separate asset, such as an appliance, it is more likely to be a capital expense.
- What is the value of the expense? If it is high, it is more likely to be a capital expense.
- Is the expense for repairs made to a property in order to sell it? If the expense is in anticipation of a sale, it is more likely to be a capital expense.
A typical capital expense is a renovation to improve a property. In your case, Shawn, since the property was not being rented out due to renovations, some of your carrying costs, such as property taxes, insurance, interest, utilities and condo fees may be considered capital expenses, meaning you cannot deduct them.
What are soft costs? How do they treat?
According to the CRA, soft costs are the expenses incurred while renovating a property to make it more suitable for rent. These include the expenses above, as well as legal or accounting fees.
Soft costs may be deductible against your rental income, but the deductions are limited to the rental income earned. In your case, Shawn, they may be considered capital costs that increase your adjusted cost base and reduce the capital gains upon the sale of the property.
Capital gains or business income?
Another consideration, Shawn, is that if you bought, renovated, and sold the property, there is a risk for your capital gain—which is only 50% taxable—is considered business income. Selling a property soon after purchasing it may be considered flipping, and the resulting business income is fully taxable.