Real Estate

Question about landlord accounting

  • Last Updated:
  • Dec 13th, 2019 9:51 pm
[OP]
Newbie
Mar 24, 2018
59 posts
48 upvotes

Question about landlord accounting

I am a first-time landlord and just started renting out a basement suite this past September (but took possession on Aug 1).

Anyhow, my issue is that I know most people suggest depreciating capital invested and house value (Property value - land value) at rates of 20%/year and 4%/year respectively.

My issue is that if I depreciated both this year because the house was not rented 20% of the time and there were quite a few startup costs (and Edmonton property taxes are really, really high) I'd actually end up with a loss which really isn't of much use. Instead I think it probably makes more sense to start the depreciation next year. Is that technically allowed?

Thanks in advance.
11 replies
Deal Addict
Mar 3, 2018
1852 posts
1838 upvotes
GTA
I would consider all the tax consequences before claiming depreciation (CCA) on the building. If the property rises in value and you eventually sell you will have to include all the depreciation claimed over the years back into your income in one year. That can be a big tax hit after a few years of ownership.

Also if you also live in the property you will lose your principal residence exemption for the basement unit if you claim CCA. Making that portion of the property subject to capital gains tax otherwise avoidable.
[OP]
Newbie
Mar 24, 2018
59 posts
48 upvotes
I think those comments are fair but I live in Edmonton. Property values haven't increased in about 12 years so capital appreciation isn't really on the radar up here.

The other point is that when we do sell I probably won't be working anymore so if there is a big capital gain on the basement portion of the rental we can just take that as our income for the year as we downsize.
Deal Addict
Mar 3, 2018
1852 posts
1838 upvotes
GTA
SleepyFunds wrote: The other point is that when we do sell I probably won't be working anymore so if there is a big capital gain on the basement portion of the rental we can just take that as our income for the year as we downsize.
Interesting as most people plan their affairs to pay less taxes and not the other way around. I commend your voluntary contribution to the treasury.
[OP]
Newbie
Mar 24, 2018
59 posts
48 upvotes
I don't quite get your issue with the taxes.

Right now I'm in a high tax bracket so I'm taking what would otherwise be direct income to me taxable at my marginal rate and deferring it by offsetting costs from capital investments and building depreciation.

20 years from now when I retire and have low income won't I be selling at only paying 50% on the taxable gain made on the property?

So to me there are 2 benefits - paying a capital gain instead of interest income and also deferring taxes to when I'm in a lower tax bracket.


Maybe it's a GTA vs. Edmonton thing. Property just doesn't appreciate much here so it is really very much a secondary consideration in this scenario.
Deal Addict
Feb 22, 2007
1959 posts
223 upvotes
Mississauga
i would highly suggest staying away from CCA on the house/land/building...

keep it simple...

record in income....all money deposited into your account (or received as cash)
subtract from your income ...all money spent to run the rental
Deal Addict
Mar 3, 2018
1852 posts
1838 upvotes
GTA
SleepyFunds wrote: So to me there are 2 benefits - paying a capital gain instead of interest income and also deferring taxes to when I'm in a lower tax bracket.

Maybe it's a GTA vs. Edmonton thing. Property just doesn't appreciate much here so it is really very much a secondary consideration in this scenario.
Despite the last ten years Edmonton real estate has still more then doubled over the last 20 years. So presuming it will not rise over the next 20 years seems unrealistic. Why expose yourself to capital gains tax needlessly by claiming CCA and losing your principal residence’s full exemption. Plus recapturing any building depreciation you claimed all in the same tax year. Not sure what you mean by paying tax on interest income. You should be maxing out your TFSA’s and RRSP’s or choose to receive dividend income that gives tax credits.

Also keep in mind CRA does not allow you to create or increase a rental loss by claiming depreciation (CCA). So if your plan was to offset your other income it won’t work.
[OP]
Newbie
Mar 24, 2018
59 posts
48 upvotes
My TFSA and RRSP are both maxed out already.

It wasn't so much a strategy to create a loss.

Here's the idea:

Rental income: $1350/month

Depreciation of building value: $500/month (assuming building value of $150,000 and 4%/year)
Capital depreciation: $125/month x 5 years and then disappears
Mortgage interest: $300/month for the basement suite alone
Property taxes: $225/month for the basement suite alone
Utilities etc: $200/month

Net income: $0

So if I don't claim the building depreciation I net $500/month of income that I then have to pay taxes on at my marginal rate.
Member
Jun 15, 2015
421 posts
454 upvotes
Thornhill, ON
Note that you cannot create a loss by claiming CCA. As an example, say you have net income before CCA of $2000. You can only claim CCA of $2000 max to reduce your net income to NIL.
Newbie
Feb 4, 2014
60 posts
42 upvotes
Montréal
I get the building CCA but what’s your ‘Capital depreciation’? Is it capital expenses like upgrade renos etc? Other than that your plan to claim CCA in order to postpone paying taxes makes sense. Just understand that if you ever sell (forget about price appreciation it’s useless in this context) the cumulative CCA claimed will be added as an income in the year of sale. So let’s say you sell in 15 years at the same price you paid today and you have claimed a total of $150,000 CCA over the years, then your taxable income will increase by $150,000 in the year you sell.
[OP]
Newbie
Mar 24, 2018
59 posts
48 upvotes
yasben wrote: I get the building CCA but what’s your ‘Capital depreciation’? Is it capital expenses like upgrade renos etc? Other than that your plan to claim CCA in order to postpone paying taxes makes sense. Just understand that if you ever sell (forget about price appreciation it’s useless in this context) the cumulative CCA claimed will be added as an income in the year of sale. So let’s say you sell in 15 years at the same price you paid today and you have claimed a total of $150,000 CCA over the years, then your taxable income will increase by $150,000 in the year you sell.
Okay, so on sale the capital gain on the sale of the basement unit in this scenario gets converted into regular income anyway?

If that's so then I guess there may not be much point in depreciating the building value then.

My issue is that even in retirement I'll still have a pretty high income from liquidating my professional corporation so I'll still be in a high tax bracket regardless so I then don't want all that extra income at once.
Newbie
Feb 4, 2014
60 posts
42 upvotes
Montréal
SleepyFunds wrote: Okay, so on sale the capital gain on the sale of the basement unit in this scenario gets converted into regular income anyway?

If that's so then I guess there may not be much point in depreciating the building value then.

My issue is that even in retirement I'll still have a pretty high income from liquidating my professional corporation so I'll still be in a high tax bracket regardless so I then don't want all that extra income at once.
In that case as you said there is no point in claiming CCA...

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