TAX PLANNING FROM THE KNOWLEDGE BUREAU
By Evelyn Jacks
Returns that include income from rental properties are often audited, so
it’s important to consider your increased tax compliance burden as a real
estate investor. If this is your first year with a rental property, it’s
especially important to set up the tax reporting and documentation properly
for an audit-proof experience. Use this checklist to help.
* A Statement of Real Estate Rentals
(Form T776) must be completed to report income and expenses on a
* Gross rental income
must be reported. It is best to open a separate bank account to keep these
funds in. If you rent to someone you are related to, you must report fair
market value rents if you actually rent for less.
* Advance rent payments.
These should be included in income according to the years they relate to.
* Lease cancellation
payments received should be included in rental income.
* Profit motive required
. In order to deduct operating expenses from rental income, there must be a
profit motive (i.e., revenues should exceed expenses).
* Fully deductible operating expenses
include maintenance, repairs, supplies, interest, and taxes.
* Partially deductible expenses
include the business portion of auto expenses and meal and entertainment
expenses incurred (but generally only if you have a number of rental
* Expenditures for asset acquisition
or improvement cannot be deducted in full. Rather, Capital Cost Allowance
(CCA) schedules must be set up to account for depreciation expense. If an
expenditure extends the useful life of the property or improves upon the
original condition of the property, then expenditure is capital in nature
and not 100% deductible.
* Land is not a depreciable asset.
It is necessary to separate the cost of land and buildings on the CCA
schedule. A rental loss cannot be created or increased with a CCA claim.
* Not deductible are any expenses that relate to the
owner’s personal living expenses, or any expenses that relate to the cost
of the land or principal portions of loans taken to acquire or maintain the
Essential Tax Facts: How to Make the Right Tax Moves and Be
by Evelyn Jacks.
© 2019 The Knowledge Bureau, Inc. All rights reserved. Reprinted with
is the founder and President of Knowledge Bureau, which
brings continuing financial education in the multiple areas of
specialization to advisors and their clients. She is the author of 52
books on tax and wealth planning. This article
originally appeared in the
Knowledge Bureau Report. Follow Evelyn Jacks on Twitter
@EvelynJacks. Visit her blog at www.evelynjacks.com.
Notes and Disclaimer
The foregoing is for general information purposes only and is the opinion
of the writer. No guarantee of investment performance is made or implied.
It is not intended to provide specific personalized advice including,
without limitation, investment, financial, legal, accounting or tax advice.