Tax checklist for rental property owners

What to report, what to expense

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.

Income reporting

* A Statement of Real Estate Rentals (Form T776) must be completed to report income and expenses on a calendar-year basis.

* 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.

Expense reporting

* 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 properties).

* 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 property.

Excerpted from Essential Tax Facts: How to Make the Right Tax Moves and Be Audit-Proof, Too, by Evelyn Jacks.

Evelyn Jacks 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.