Collecting rental income on a property is a fantastic way to help with mortgage costs and pay off an investment property. Rental income, though not associated with a paycheck, still needs to be reported alongside your income taxes. Not reporting your rental income fully (or at all) can lead to penalties and interest payments. If you’re collecting rental income, it is important to speak with a certified accountant on properly claiming and reporting income as well as viable tax savings. A Chartered Professional Accountant is your best bet at securing tax savings and getting the most out of your rental income.
What is rental income?
Rental income is any income collected from a tenant who is paying for access/accommodation on a property you own. Rental income can be collected from home rentals, basement suites, vacation rentals, as well as office space rentals. Any rent you collect from another person for use of your belongings goes towards your rental income that must be claimed. You claim deductions for expenses used to run the rental property (such as utilities, maintenance and upkeep), but all rent collected must be claimed in your rental income statement.
When do you have to start claiming rental income?
Rental income needs to be tracked and claimed from the moment a renter starts paying. Whether it’s a short term rental such as a few days in a vacation rental or a long term office lease, all rental income must be claimed from the moment it is collected.
Are there any exceptions to needing to claim rental income?
When it comes to rental income, there are no exceptions on what you need to claim. If you are collecting rent from an adult child or family member who is living with you does not necessarily have to be claimed as rental income as the income collected could be considered assisting with living expenses. Differentiating between rental income or simply assisting with living expenses can get very specific, if you’re unsure about where you fall, speak with an accountant! If you are collecting money from a tenant for the purpose of rent, all of it has to be claimed on your taxes.
When do you report rental income?
If you’re collecting rent as an individual, you will need to claim all rental income alongside any additional personal income with your personal taxes. Personal taxes for the previous calendar year must be claimed and paid by April 30th, annually. If you are a property manager and rental income is part of your corporate capital, rental income must be reported at your corporate year end.
How are taxes on rental income calculated?
For corporate taxes, rental income is considered an investment income rather than a part of the business’ regular income. Investment income is taxed at a higher rate than regular income. In Canada, 50% of the value of any capital gains are taxable and the amount you pay is calculated by your corporate annual income. When an individual is reporting rental income, that income is added to the individual’s personal tax rate like any other form of personal income.
What are the common deductions for rental income?
There are many deductions for rental income that you can use to lower your tax payments. The following are the most common deductions that are also easy to keep track of and claim.
- Advertising — whatever your costs for advertising the property you seek to collect rent on
- Insurance — you can use all insurance costs associated with the property you are renting as a deduction for your taxes
- Interest — any interest you pay can be used as a deduction
- Professional fees — this could be costs of bookkeeping, accounting, and other professional fees associated with your rental property.
- Management fees — if you have hired professional property management, this cost can be deducted from your rental income
- Repairs and maintenance — all costs associated with the upkeep of your property are common deductions from your rental income
- Property taxes — these taxes are taken into account as a deduction from your rental income taxes
- Travel expenses — the costs associated with traveling to and from your rental property (gas, hotels, meals, etc) can be deducted as they are business expenses
- Utilities — if you pay for your rental property’s utilities, these expenses can be used as a deduction for your rental income
What happens if you don’t report all your rental income?
If you do not report your rental income honestly you may end up having to pay penalties and interest. Not reporting your rental income can also lead to your taxes being reassessed and audited, which would further increase the interest and penalties you pay going forward as well as for previous offences.
Understanding the associated accounting with rental income for property managers as well as individuals can be a complicated process. That’s why if you are collecting rental income, you should contact Gallo LLP Chartered Professional Accountants. Our expert team will help you get the most out of your rental income by applying whatever deductions are possible. If you want to win in business, Gallo LLP is here to help!