Tax Tip Thursday

This week’s show is for all you people who ran out and bought cottages, during covid, with the view that you could turn them into a money-making venture!  Great idea, but beware of the pitfalls. These concepts apply to both long- and short-term rentals.

For those of you who have a rental property (or considering taking one on), make sure you are evaluating cash flow/profit. Remember that cash flow is NOT profit and there can be significant differences! I have had several clients get surprise tax bills at the end of the 1st year of ownership.

They have a rental property that breaks even every month, so they figure they are good and will NOT have a tax bill.

As an Example:

Rent – $1,800/mo

• Mortgage – $1,300/mo
• Property taxes – $400/mo
• Insurance – $95/mo
• Bank charges – $5/mo

Total Expenses – $1,800/mo

Does this example apply to all rentals?

Please keep in mind, that this example is for a long-term lease/rental.  If you have an Air BnB, the costs (and revenue) are SIGNIFICANTLY different! Make sure you run your numbers or come see us and we can run them for you.

Looking at the above, your rents are covering your expenses, and that works out perfectly!

The problem is: your total mortgage payment of $1,300 is not all deductible; only the interest is deductible.

Depending on how your mortgage is structured, your interest might only be $700 of the $1,300. This means that you will have $7,200 of non-deductible income received in the year ($1,300-$700 = $600 x 12= $7,200).

What can you do about it?

1. You can raise the rents, but there are a lot of rules around that. Needless to say, your tenant will not be happy and may not continue to be your tenant.
2. You can restructure your mortgage such that your payments have a higher interest component (making more of the mtg payment deductible). You should be very careful with this strategy, but there are some unique strategies associated with this approach.
3. You can put aside some of the money each month to cover your tax bill at year-end.

The long and the short of it is, just because you are breaking even on the monthly payments, does not mean that you are breaking even. Know that there is a tax bill potentially coming your way.

Is that why rents are so high?

Whenever I see a property for rent in the Uxbridge Facebook groups, people are always chiming in and berating the people renting the homes for charging outrageous amounts of rent.

For those that have never owned a rental property, you should know that there are a ton of costs associated with owning a rental property: maintenance, repairs, roofs, appliances, furnaces, etc….  AND even just a $500k mortgage can cost $2,500 a month in mortgage payments. Add on property taxes $500 a month and it is costing $3k a month, so would people have you rent it out for $2k a month?

It is not an easy venture to own a rental property.

The Mad Accountant team is here for you!

The variables involved in making the decision to rent a property can overwhelming! If you would like some help evaluating your business model for a rental property, book an appointment to ensure you have all your bases covered.

Disclaimer:

This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal or tax advice nor can it or should it be relied upon. All tax situations are specific to each individual. If you have specific tax questions you should book an appointment for a 1 on 1 consultation.