Friends are looking to buy their first home. I’m encouraging them to find a place with at least a room if not a larger or separate area they can rent out.
Sacrificing some privacy enables your home to contribute to your income, to have a boarder or tenant help you pay off the mortgage.
Also, there are several potential tax advantages. For example:
ONE: You may deduct not only expenses that relate directly to the rented out portion, but also a pro rata share of the over-all costs of running the home (like part of the property taxes, home insurance, mortgage interest, repairs and maintenance – expenses which otherwise you could not deduct).
TWO: You may deduct money you pay family members in a lower tax bracket who do the work related to the rental. They will pay less tax on this income than you would have, and can then use the money to pay their personal expenses – expenses you might otherwise have paid for them with your own after-tax dollars.
THREE: If all these expenses exceed your rental income, you may deduct the loss from your other (day job, investment, retirement etc.) income. However, the tax office would want to know that long term you had a “reasonable expectation of profit” from your rental(s).
It sounds simple: declare your rental income and deduct related expenses. However, there are a few twists and turns.
For example, usually if you spend money to improve a rental space and so its value, you would deduct that amount over several years. But if the improvements are to make the rental space more handicapped accessible, you may deduct all those expenses in the year you spend the money.
Under certain conditions, you may rent out your home but still maintain its capital-gains-tax-free status as a principal residence.
To make sure you benefit from all the tips and don’t fall into any of the “traps” of rental income, please go online or phone the Canada Revenue Agency to get the CRA Rental Income Guide.