(If you missed Part One, you can check it out here).
It felt like I won the lottery at tax time this year. My cheque from the government was five figures. I am not bragging about this, because the reality is that the sale of my Toronto Condo happened at a net loss to me after real estate agent fees and our Toronto tri-plex cost us almost $30,000 last year. So, the money I got from the government didn’t come close to easing the financial pain I experienced in 2006, but it did make me glad they were investments and not solely my homes. Had they been only my homes, that money would have been gone for good.
So, how can you maximize the tax write offs from real estate investments? Personally, I always consult my accountant. In over 15 years of using an accountant, I have only once paid him more than I have gotten back from the government. But, I don’t just rely on him, I do have a decent understanding of what qualifies as current and capital expenses.
First, the definitions. An easy way to think of a CAPITAL EXPENSE is that it provides a lasting benefit and improves the property beyond it’s original condition as most renovations do. If it’s a separate asset like a new stove or fridge then it can usually be treated as a capital expense. Typically these expenses are significant (in the thousands of dollars). Usually these expenses must be deducted over several years versus current expenses which usually get fully deducted in the year they are incurred.
Some examples of capital expenses include:
- The purchase price of rental property,
- Fees associated with the purchase of the property such as legal fees,
- Purchase of furniture or appliances to go in the property,
- The addition of a deck to the property, or the addition of another bathroom.
A CURRENT EXPENSE is generally something that repairs the property to its original condition, for example a coat of paint or repairing stairs. The expense is usually one that recurs on a regular basis and provides a short term benefit. Some common current expenses include:
- Costs of renting the property out (property manager, advertising, cleaning costs),
- Insurance on the property,
- Interest on your mortgage (note that your principal repayment is not deductible),
- Maintenance and repairs that restore the property or item to it’s original condition,
- Property taxes,
- Your hired help: accounting fees, property manager fees, cleaning people’s wages, consultants, lawyers),
- Travel costs to collect rent, view or work on the property (note that this includes transportation costs but not typically lodging or food),
- And office expenses that are directly related to your investment (things like long distance fax charges and telephone bills we have expensed but pens and paper we have not, although you can if it’s directly related to your investment activities).
Published:October 29, 2007
THE DISCLAIMER: Neither of us have any legal training, nor do either of us have extensive accounting training. We are not experts and we always consult with our accountants and legal counsel before we make decisions. We pay money to get quality advice when we need it and always advise our friends, family and readers to do the same.