Rental Properties – Taking the Leap

With a serious housing crisis, there are a lot of opportunities available to prospective landlords. However, caution and due diligence need to be taken to ensure that you don’t end up in a bad situation. In this article, we’re going to discuss some of the possibilities and pitfalls to avoid should you choose to become a landlord.

Short-term Rentals

Airbnb, Vrbo, or just private cottage rentals are all examples of opportunities for short-term rentals. Although this does not help the housing crisis, it can help you offset some of the costs of owning a property, or even help turn a property into a profitable business investment.

Key Considerations

When starting a short-term rental, there are a few things that you need to consider.

1. Obey the law – it sounds obvious, but there are a lot of illegal short-term rentals out there. As of January 1, 2023, all short-term rental expenses can be denied by CRA if the rental is not registered and obeying all provincial, regional, and municipal laws with regard to how the rental is run. This means that if you get caught running an illegal short-term rental, you may have ALL your expenses denied, but still have to pay tax on the total income.
2. You need to declare your income on T776 of your tax return. You can also claim reasonable expenses related to the property assuming you’re following the law and are running an above-board short-term rental
3. Costs – There are a lot of additional costs to running a short-term rental. There could be:
   1. Advertising costs if you’re renting it privately
   2. Cleaning costs, unless you’re cleaning it yourself
   3. Supply costs, such as keeping coffee, cream, and sugar available
   4. Repairs and maintenance costs. This is the one that can be a nightmare if a renter trashes your place.

Exchange Students & Home Stays

This is a great way you can help supplement your mortgage payment. People who are plugged into different communities can find opportunities to help international students experience Canada or get an education here by providing this service. 

There are many agencies available that can help get someone placed in your home, or you can always go through private channels.

Key Considerations

When taking an exchange student or accepting someone on a homestay, consider:

1. Location matters. This is particularly important for this group of renters as they won’t have a car and tend to gravitate towards cities. If they’re students, they’ll likely want a location closer to their learning institution.
2. Keeping the fridge stocked. A lot of these situations require you to keep the students fed, or at least provide food for them to eat. It’s an unusual situation when it’s a requirement of the contract as there is no opportunity for you to deduct meals on T776. Seek the advice of the agency you’re using, or better yet, an accountant, to make sure you’re reporting your expenses properly.
3. Someone is living with you. That’s right, this person is living in your house. They will interact with you and your family. Finding a good fit is really important. A great relationship can last for a lifetime, but a bad one can cause traumatic experiences for you and your family.
4. Agencies can help. Particularly if you get a bad exchange student or homestay person, the agency you went through will take care of payment and will move them out and move a new person in if they become a problem.

Renting a Room

This is very similar to having an exchange student or a homestay come into your house. The big difference is this rarely goes through an agency, so you’re responsible for everything from the lease agreement to collecting the rent.

Beware that if you’re doing this with a family member, you cannot fabricate a rental loss by having more expenses than rental income – that’s a cost-sharing arrangement. If you are in a cost-sharing arrangement, you do not report it on your income taxes.

Changing the Use of a Property

You may decide you’re going to travel abroad for an extended period or that you’re going to buy a new place and rent out the old one. You may also decide that you want to live in one of your rental properties. In these cases, it is important to make a Section 42 election to the CRA to inform them of the change in use.

If you don’t, it could create Capital Gain and Principal Residence Exemption issues when you sell the property. Also, the penalty for failing to file this election on time hurts – it’s as much as $8,000!

Depreciation

Depreciation can be used to reduce rental income, however, you need to seek advice before deciding to take depreciation on a rental property.

Any depreciation claimed (it’s called “Capital Cost Allowance” or “CCA” on your tax return) decreases your adjusted cost base when Capital Gains are calculated. In addition, it may create a taxable event should you change the use of a property where depreciation was taken.

Risk vs Reward

Landlording isn’t for everyone, that’s for sure. Due diligence and good record-keeping are a must if you decide to enter the game. Planning needs to come before you make decisions as there can be serious financial consequences to poor decision-making. 

For instance, the recent increase in the Capital Gains Inclusion rate is really going to affect landlords who have taken significant depreciation on their properties, or who have experienced significant appreciation in the property when they sell or die. Don’t let all of your hard-earned assets be eaten up by tax.  Make sure to plan ahead.

KATA Can Help!

If you’re considering entering the realm of landlording, planning is vital. Whether it’s modeling a short-term rental idea, or considering buying a rental property, KATA can help you plan for what you need.

If you already have multiple properties, we can build an almost completely automated bookkeeping system to help you maintain good records and report your rental income on your taxes easily.