Renting Out My Cottage, Tax Questions
- Cottage season is basically June - Sept (at best) so roughly 1/3 of the year.
- I would like to rent it out for 4 weeks so approximately 1/4 of the cottage season (4/16 weeks) so based on this 25% of the cottage expenses should be used to offset the income and 75% of the expenses are for my own personal enjoyment
- Expenses would including things like phone, utilities, etc. but since they span over the full year I would assume 25% of the year costs would be for earning income since I need to pay those in the winter to be able to have the opportunity to rent during the summer season. Is that fair or would Revenue Canada only allow expenses for the 4 weeks in the summer?
- I know that repairs and property upgrades would be capital expenditures and wouldn't allow you be in a loss situation but could be used to lower taxable income so I think that is fine but the same question of what percentage could be used would hold true, 25% (4/16) or ~4% (4/52).
- My big question is about interest expenses, can interest expense on this actually allow you to take a loss that could be applied to my personal income? Or is it similar to capital expenditures where it can reduce taxable income to 0 but no lower? Also the percentage of interest paid in the year that can be used needs to be determined 25% or 4% (same as above).
Here is a very basic sample income statement that hopefully illustrates my questions:
income earned - $4,000
phone - $ 360
interest - $15,000
electricity - $600
insurance - $900
taxes - $2500
at 25% - rental expenses are $4,840
at 4% - rental expenses are $775
In one case this means i am running the cottage rental at a loss of $840 with no income tax (potential an income tax break for my other personal income tax) and the other case I am generating a profit of $3225 and would be subject to paying income tax at a high level.
Which is the right scenario?