By Daryl Harris on January 8, 2014
Renting a room or some space at your house to supplement income? Here are some basic rules for reporting your rental income:
Income and expenses will be reported on a calendar year basis. Accrual accounting (report income when receivable and expenses when payable) is supposed to be used. Do open a separate bank account for your rental income and expense transactions.
You may not be able to write off losses if you can’t justify that you are charging rent at fair market value. Take newspaper clippings and other proof of rentals in the area and add to your permanent records so you can make a case for what you are charging, especially if you’re renting to a related person.
To deduct operating expenses from rental income, there must be a reasonable expectation of profit on an annual basis. Fully deductible operating expenses include maintenance, repairs, supplies, interest, taxes. Partially deductible expenses could include the business portion of auto expenses and meal and entertainment expenses incurred. But this is where many tax filers make mistakes.
Take note of these mistakes:
#1: Maintenance and repairs are 100% deductible; improvements over the original condition or that extend the useful life of the asset are added to cost base because they are capital in nature. Put those expenses on the Capital Cost Allowance (CCA) statements instead.
#2: Land is not a depreciable asset. Separate the cost of the land from the cost of the buildings for the purpose of your CCA statement.
#3: The deduction for CCA is always taken at your option so if your assets, particularly the building, are appreciating in value rather than depreciating, you may wish to forego the claim to avoid Recapture in income later.
#4: CCA deductions cannot be used to create or increase a rental loss. This rule is applied to all rental properties you may have together. Thus, if you have more than one property, CCA may be claimed to create a loss on one property so long as you do not have a rental loss on all properties combined.
#5: Don’t claim auto expenses for visits to collect rents if you own only one rental property. However, if you personally do the maintenance and repairs for a nearby property, and use your car to carry the tools to do so, the claim will be allowed.
#6: Don’t deduct any personal living expenses.
#7: Family member rentals may be exempt. If you are renting to your youngest son, Charlie, for the cost of the groceries, there is no expectation of profit. Don’t expect to be able to deduct a rental loss against other income, you don’t need to report the income, either.
Ask your accounting professional to help you work through the details – Clearline Books Ltd