Claiming Rental Properties As A Business
Q. My husband and I own 7 rental units and are having trouble with the accountant running this as one business. They claim rental properties is not a business. Do other small investors just claim each property, or can you in fact claim it all as one business? Also, i was under the impression you could re-invest the capital gains of one property and roll-it over into the purchase of another if you did it within 120days in Canada. Is this wrong?
Thanks and I appreciate your newsletters!
Melanie from Comox, British Columbia
A. Keep in mind the following information is just our opinion based on what
we've learned over the last few years, and we are not giving accounting
advice. We cover this topic in even more detail in our
seminars....
CRA doesn't normally allow landlords to treat their rentals as a 'business'
and deduct all the things a business would be able to deduct.
If you own 2 or more properties, CRA allows you to deduct
some
business-type costs, but not all compared to what a traditional business
would deduct. For example, you can deduct advertising, insurance, and
interest, but you cannot deduct a home office. For more information, see the
CRA tax guide for rental properties (T4036 -
http://www.cra-arc.gc.ca/E/pub/tg/t4036/README.html)
If you own property and have 6 or more employees, then CRA assumes
you are a full business and allows you to deduct the full range of expenses.
This is because with 6 employees CRA deems you to be an 'active' real estate
business (not passively holding real estate). CRA looks at what the employee
does and for what time (ie. full-time vs. part-time) instead of what they
are compensated. I suggest you consult an accountant if you want to
structure this type of setup.
If you want to deduct all the normal deductions allowed for businesses, but
you don't want to have 6 employees, another way is to operate another home
business. For example, some people run networking marketing businesses,
while others may offer real estate consulting services to help locate
investments, lease them, and more.
How would this all look on your tax return?
Option 1 - a separate T776 form for each rental property, one T2124
for your separate business (network marketing, real estate consulting, etc.)
Option 2 - one T2124 for your real estate business OR a corporate tax
return (both options require 6 active employees)
With respect to rolling over capital gains, that concept is an American one
and is probably referring to the 1031 tax free exchange. Many US-based real
estate investing books talk about this concept. In recent years, some
political parties in Canada have attempted to introduce legislation to bring
this concept to Canada, but so far nothing has been passed.
This article is copyright © 2004-2010 Spirepoint Properties. All rights reserved.
Paul Blacquiere and Joanne Beehler are full time real estate investors and have been investing in Ottawa, Ontario, Canada since 2002. They are owners of Spirepoint Properties, a Canadian real estate investing company dedicated to making real estate investing easy.
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