It's Tax Time for your Rental Property

Welcome to Canada's Property Management Podcast, your number one resource for investing, managing, and maximizing the value of your real estate assets. And now here's your hosts, Carla Browne and Adrian Schulz; Canada's rental property experts.

Carla Browne (00:19):

What time of year is it Adrian?

Adrian Schulz (00:21):

It's tax time.

Carla Browne (00:23):

Yikes, hey. Not the topic that everyone loves to listen to, but I do hope that people will take away a few tips on this one on how we can make it a little bit easier if you do have investment property.

Carla Browne (00:34):

The one thing before we kind of dive into all of our tips, the biggest tip that I always start with when I talk to investors is to treat this like a business, right, from the get go. Don't intermix this, even though it might not...

Carla Browne (00:48):

You don't need to form a corporation or anything like that. That's not what I mean, but start off trying to separate your expenses and your income on the property versus everything else on yourself from a personal perspective.

Carla Browne (01:00):

So open up a separate bank account, have everything go through that. If you're going to get a credit card, get a credit card that's associated just with your rental property, things like that.

Carla Browne (01:10):

So our listeners can't see you smirking, but you're smirking. So, I really want to know what you're smiling about.

Adrian Schulz (01:15):

Well, Carla, you're inside my head because I was going to pull out that I actually, from the very beginning, set up a separate bank account and a separate Visa card at a separate bank even was the cleanest way to assure that nothing got missed.

Adrian Schulz (01:33):

And frankly, maybe if my accountant is listening, he's going to say, "Yes," but I hate you for it. But I literally give all 12 bank statements and all 12 Visa statements for the rental property components of our life.

Adrian Schulz (01:46):

I put all those together, along with the following: a cash basis income statement from the property management company, copy of the property tax bill, right. And I always make sure it's reconciled, that the number matches; if the property manager pays the property tax, that the number on the bill matches what the income statement says.

Adrian Schulz (02:09):

Do that preliminary work for your accountant, because you don't always know if they're going to check, one would presume, your mortgage statement. So we always have the mortgage interest entered as a non-operating expense. That way it shows up underneath the net income, okay? As well as, of course, as the principal payment.

Adrian Schulz (02:33):

So, making sure that that is cleanly separated really makes it easy for accountant. Any credit line or lending statements that had interest paid regarding the initial acquisition or any capital improvements. What do I mean with that?

Adrian Schulz (02:50):

So if you bought your rental property with an equity takeout or you used a HELOC from your primary residence and you incurred an interest expense there, that's tax deductible. So, you actually want to include that with your package and any home office expenses related to managing of the asset. For example, your primary residents, mortgage statement, property tax, bill, and utility bills.

Adrian Schulz (03:17):

Yes, if you have a home office that is utilized for you to manage your rental property, your rental property assets, your accountant can within a certain criteria and formula actually offset some of the rental income tax exposure against some of the in-home office expenses that you incurred.

Adrian Schulz (03:42):

And then of course, I always think it's a great time, like mentally on an annual basis to speak with your realtor and your property manager, your mortgage broker. See if you have any equity in either your own home or in your rental property home that you can hood potentially refinance for a tax free equity withdrawal to invest in more, right.

Adrian Schulz (04:09):

And so many people forget that you can... whenever you pull out equity out of a piece of real estate that you own, that cash you're pulling out, it's pulled out without having to pay any tax on it.

Adrian Schulz (04:23):

So here we are talking about tax time, but imagine not having to pay tax on your equity withdrawal. Okay? And then this may be a little bit controversial and I will leave it up to the CRA or whomever else wants to come and arrest me, but I would suggest that you always buy mortgage protection insurance on a rental property.

Adrian Schulz (04:48):

In my opinion, I am not an accountant, I am not a tax specialist, but in my opinion, the cost of mortgage protection insurance is a rental property expense. And here is why: if something happens to you and you don't have a renter, you still have to pay for the mortgage AKA mortgage protection insurance.

Adrian Schulz (05:10):

I would argue all day, that's a legitimate business expense, right? And once you've got that protection set up, yes, you can keep it or go and shop it with a life insurance specialist.

Adrian Schulz (05:21):

But the point there is that mortgage protection insurance covers the cost, the monthly mortgage payments in case something happens to you and you don't have a tenant.

Adrian Schulz (05:34):

That means that you may not have sufficient income to cover the mortgage on your rental property. That's why I suggest that you, in fact, have mortgage protection. And again, in my personal opinion, it is a legitimate business expense.

Carla Browne (05:50):

Yeah. I love this topic. I love that we're covering because I'm loving how passionate you are showing. You've become the greatest hand talker throughout this podcast. I hope that-

Adrian Schulz (05:59):

I'm actually doing puppetry while I'm talking.

Carla Browne (06:01):

I hope we can get this one in video. You're like a... become Italian. You took your German personality and became Italian all of a sudden. And no disregard to the Italians, it's just that they're hand talkers and you became one in this episode. So, that's fantastic.

Carla Browne (06:14):

But there's so many tax benefits that an investor can take advantage of. So please make sure you are talking to an accountant. We get this one all the time when someone's looking at property management services.

Carla Browne (06:25):

"Well, is that tax deductible?" Of course, it's tax deductible. Anything related to your property to make it an income producing thing is going to be tax deductible for you essentially.

Carla Browne (06:36):

And you talked about the home office, property management services can often be a cost savings because we get everything all nice and neat in this statement for you on an annual basis that you don't have to have your accountant necessarily do all of the figuring out, because unfortunately accountant gets paid quite a difference in the hourly rate versus a property manager. That part I do know.

Carla Browne (06:56):

So anyways, I think we gave some fantastic tips. I would suggest honestly, that if you haven't done your taxes yet, listen to this episode twice, because Adrian gave some absolutely great nuggets. He was just talking quite fast. You have to visualize it with your hands as well, with his hands as well.

Adrian Schulz (07:12):

And by the way, speaking of fast, when you go and buy your next fast car and you are a real estate investor, okay, make sure that you use that car to drive to your properties and to go and check on all of your real estate assets so that part of your vehicle expenses too can be tax deductible. And yes, I was using my hands and doing hand puppetry while I was saying that.

Carla Browne (07:41):

It is a business, so everything that is business related definitely is part of that.

Adrian Schulz (07:47):

That's very real property management.

Speaker 1 (07:50):

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