Owning rental property provides income and allows deductions that you can claim on your tax return. These deductions include expenses, such as homeowner's insurance, property taxes, maintenance fees, advertising, mortgage interest, utility costs, and property management fees.
You may also qualify for capital cost allowance or CCA, which is depreciation that you can claim on your tax return. The Canada Revenue Agency has specific requirements for claiming CCA on Rental Property.
Depreciable property is subject to wear out or may become obsolete over time, and hence, you can deduct their cost over a period of several years.Due to this, you can claim CCA against depreciable rental property (e.g., real estate, computers, machinery, and office equipment).
While renting a house or a condominium, you can write off the capital cost of the property; this includes the purchase price, the legal fees associated with the purchase, and any incurred cost of equipment and furniture.
For tax purposes, depreciable properties are grouped into various classes. Therefore, to establish the CCA amount you can claim, you must first determine the rate applicable to each class.
For example, a 4% deduction rate applies to depreciable property in class 1, including most buildings occupied after 1987. However, the same type of property can belong to a different class, so check each class carefully before categorizing it.
For example, most buildings occupied before 1988 belong to class 3.
The complete list of depreciable property classes is posted on the CRA's website.
CCA Calculation Method
Your CCA is based on the type of rental property and when you rented it. To determine the amount, you may use the "declining balance method." In this case, your CCA amount is based on any depreciation (CCA) claimed in prior years subtracted from the capital cost of the property. As you claim the CCA in subsequent years, your remaining balance declines. You can claim any amount of your allowance for the year, subject to the maximum. For this reason, you may want to hold off on claiming your CCA in a particular year where you don’t owe taxes, since taking the allowance lowers the amount you're entitled to in upcoming years.
Selling a Property
Selling the property may result in a "recapture" of your CCA. You would add this recaptured amount to your taxable income when preparing your tax return. Recapture may happen if the proceeds from the sale exceed the remaining undepreciated capital cost upon selling the property.
Alternatively, the deduction from your income may result in a “terminal loss”. Terminal loss is when you don't have any depreciable property in the class at the end of the year, but still have an outstanding CCA amount that you have not claimed.
Upon sale, any profit you earned on the rental property over and above your initial cost will be treated as a capital gain. Capital gains are taxed at 50%, whereas recapture is 100% taxable
Taxes and Rental Losses
If your rental expenses exceed your gross rental income, you have incurred a loss. You may be able to deduct your rental loss from other sources of income, but you cannot use CCA to increase or produce a rental loss. For example, you own two rental properties. The net income for one property is $3,000, while the other property yielded a loss of $5,000. Therefore, you suffered a loss of $2,000. You cannot claim any CCA on your rental buildings or equipment, because you cannot increase your net rental loss by claiming CCA.
Know the Effects
There are pros and cons to taking CCA. On the upside, the allowance lowers your taxable income, which ultimately reduces your tax liability. On the downside, all prior CCA claims are recaptured and treated as taxable income when you sell the property, which will then increase your tax liability. The decision as to whether to claim CCA should be discussed with a professional.
Feeling overwhelmed? Consider coming into the Softron Tax office and have one of our tax experts complete your return from start to finish!
Posted on 01 Dec 2021