Although taxes are not due for almost 2 months, completing tax returns before the deadline is top of mind for me and many other real estate investors.
We recently completed most of our tax work needed, and sent if off to our accountant. I’m only waiting on a T4 slip from my employer.
It has been a learning curve to get to this point, and here are some tips I have used along the way that make tax time much easier:
1. Each Property Has Own Bank Account
This is key to understanding how each property is performing. This also makes it easy to do your bookkeeping, in fact your bookkeeping is almost completely done for you.
We ensure that every expense and all income for a property is only in and out of that property’s bank account. When you start paying for things personally, then reimbursing yourself from the property, it turns into a bookkeeping nightmare.
2. Know Your Deductions and Credits: Use a Checklist
Common deductions for a real estate business:
– interest paid on the mortgage
– property taxes
– repairs to property
– gifts to tenants(ie welcome basket)
– market research
Less common deductions:
– interest on loans incurred to invest in real estate(line of credit used for downpayment for example)
– Capital Cost Allowance is more common with larger buildings(multi family and commercial) than single family homes. That being said, CCA can be worthwhile once your rental income exceeds your expenses by a large amount to offset taxes payable. Keep in mind you will likely need to repay these saved taxes upon sale/deemed disposition of the property, so please consult your tax advisor to see what’s best in your situation.
You can download a useful checklists here.
3. Stay Organized
I am not a very organized person, so thank God for my wife. She keeps close track of the receipts(I must remember to write on the receipts what each expense was for), and reconciles them with the bank accounts using spreadsheets. The only thing I need to remember to do is use the proper bank card for the proper expense. It’s wonderful that she has even put labels on the bankcard telling me which one can be used for which property/business.
If you are well organized, congratulations! If not, hire or marry someone who is 🙂
4. Make Sure Your Advisor is a Real Estate Expert
There are many good accountants and advisors out there. In my experience however, there are very few who are real estate experts.
I get my advice from accountants who own real estate. They know what works best for them, and can translate that into what will work best for me.
My accountant, like all advisors that I lean on, are real estate investors. Mine even wrote the book on real estate taxes in Canada!
5. Repair or Improvement?
This is a common question I get from other owners of rental property.
Repairs can be immediately deducted from income. Improvements must be capitalized over time (see CCA above) , this is usually less desirable.
If you are bringing something in your property back to original condition, this is generally a repair expense.
If you are adding something new(a pool or theatre room, finish a basement) or making an improvement(replace ordinary counter with better one like granite), this will need to be capitalized, deducted over time.
Something that has become my mantra is “I am bringing it back to original condition.”
6. Review Last Year and Make Your Next Tax Plan the Year Before
It’s good to step back from the busyness of life and look over an annual “report card.” Since the rewards of real estate are slow, annual taxes provides an opportune time to review the fruits of the hard work. The nice thing about investing in real estate is improvements/net worth becomes markedly better year after year. This information can revitalize you and helps reinforce that all the hard work IS worthwhile!
Your goals and circumstances change often(mine do anyway). It’s important to review your taxes to make sure that your tax plan is helping to get you closer to your goals.
If you fail to plan, you plan to fail
7. Know Your Deadlines
Personal Taxes must be filed April 30th.
Business Taxes must be filed June 15th.
Taxes for both must be paid by April 30th. A tax Callander can be found here.
Taxes are just one component of real estate investing that requires an intimate knowledge. To succeed you must educate yourself, or hire someone like me to do it for you 🙂
Until next time,