Friends are out to buy their first home, and 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. Also, there are several potential tax advantages.
You may deduct not only expenses that relate directly to the rented out portion, but also a pro rata share of the overall costs of running the home.
You may also 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.
And finally, 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 accessible for people with disabilities, 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.
Mike Grenby is a columnist and independent personal financial advisor; he’ll answer questions in this column as space allows but cannot reply personally - email firstname.lastname@example.org