Previously, I wrote about the two types of expenses you can claim on a rental property, current and capital expenses, and how to tell which is which.
Now it’s time to get down to the nitty gritty and take a look at some of the specific rental property expenses you can and can’t deduct from your income tax. Today: capital expenses.
Capital Expenses You Can Deduct
These, as previously discussed, are expenses that you deduct the cost of over a period of years according to the Capital Cost Allowance Rules (T4036 – Rental Income).
Capital costs associated with buying your rental property can be deducted, such as:
- the purchase price of rental property; and
- legal fees and other costs connected with buying the property.
If you’re renting furniture and equipment with the property, this cost would also be a capital expense.
Generally, any renovations or repairs you make to your rental property that extend the useful life of your property or improve it beyond its original condition can be claimed as capital expenses.
Capital costs can also be claimed for repairs you make to your rental property because you want to sell it, as long as you made the repairs after you decided to sell. (Otherwise, the repairs are current expenses.)
The Costs of Making Your Property More Suitable to Rent
If you buy an older building that has to be repaired or renovated before you can rent it, the cost of the work is a capital expense.
And generally, “renovations and repairs that extend the useful life of your property or improve it beyond its original condition” (Canada Revenue Agency) are deductible as capital expenses.
However, the soft costs you incur while you’re constructing or renovating your rental property to make it a more suitable rental are not.
Soft costs are expenses such as
- legal fees;
- accounting fees; and
- property taxes
and are either added to the cost of the building or deductible as a current expense if:
- the costs relate to the period you were constructing, renovating, or altering the building; and
- the costs relate only to constructing, renovating, or altering the building (Canada Revenue Agency).
(The Canada Revenue Agency sees “the period of construction, renovation, or alteration” as done on the date the work is completed or on the date you rent 90% or more of the building.)
If your soft costs meet these conditions and you are deducting them as a current expense, note that the amount of soft costs you can deduct is limited to the amount of rental income earned from the building.
Two Exceptions to the Capital Cost Rules
There are always exceptions when it comes to taxes!
1) Any renovations you make to your existing rental property to accommodate persons with disabilities.
The Canada Revenue Agency views these kinds of modifications to your rental property as a special situation which means instead of having to having to add the costs of making renovations to accommodate people with disabilities to the capital cost of your building and writing the cost down over a period of years, you can deduct the entire cost of the renovations in the year you paid for them. Good news!
Eligible disability-related modifications include:
- installing hand-activated electric door openers;
- installing interior and exterior ramps; and
- modifying a bathroom, elevator, or doorway so a person in a wheelchair can use it.
(The cost of disability-related devices and equipment, such as visual fire-alarm indicators and listening devices for people who are hearing impaired, is also tax-deductible as a current expense.)
2) Landscaping costs.
You can deduct the cost of landscaping the grounds around your rental property only in the year you paid the cost.
Next: Deductible current expenses for your rental property