Renovating a Rental Property – When Expenses Are Deductible

by Tax Guy - Burlington Accountant on April 1, 2009 Print This Post Print This Post

Question: I recently moved out of my old residence and have purchased another property. I am presently fixing up my old residence to rent it out. I am wondering if I am able to deduct the interest portion of the mortgage on the property if it is un-occupied for the few months it takes to get everything fixed up for rental. Thanks

In order to claim deductions you need to have a business or property that is ready and available to earn income.  Once the property is ready and available for use, any expenses you incur may then be deducted from your taxable income.

In the period before the property is ready to use, you may be able to add the interest as well as the costs to improve or fix the property to the total cost of the property.  This will increase the amount of tax depreciation, known as capital cost allowance or CCA, you can claim when the property is rented.

About The Tax Guy...

Dean Paley CGA CFP is a Burlington accountant and financial planner who services individuals and business owners locally, nationally and internationally. Dean has appeared in the National Post, Toronto Star and Metro News.

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Bob May 1, 2009 at 6:15 pm

I took out a loan to pay the down payment for a property that was not yet built about a couple of years ago. I know the interest paid during those two years could not be deducted since the property was being built. If I understand your comment in the last paragraph you made, once the property is built and ready to be occupied, I can go back and add up all of the interest paid in the past two years and add it to the purchase price?

I read in a few places that it’s usually not a good idea to claim CCA on rented property. What’s your opinion?

Tax Guy May 4, 2009 at 8:06 pm

@ Bob:

For the purposes of CCA only, you can add the cost of interest to the Capital Cost.

When property is rented, the amount of CCA you can claim is limited to the extent it can only be used to reduce net income before tax to zero: CCA cannot be used to create a loss.

With respect to whether CCA should be claimed: When you claim CCA against part of your principal residence that is rented, you will be required to claim a taxable capital gain on that portion, when it is ultimately sold. You must balance the taxability of the capital gain against the benefit of claiming the annual CCA deductions.

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