The article “What expenses can you deduct when renovating a rental property?” was originally published in MoneySense on June 13, 2023. Photo by Andrea Piacquadio from Pexels.
The purpose of the renovations, as well as the occupancy of the building, can influence whether the expenses are tax deductible or not.
“I am trying to understand if I am eligible to claim renovation expenses including property taxes, insurance, rental loss, etc. on an investment property I bought and completed renovations on.
I purchased a duplex that was rented and then vacated when final purchase went through. The intention was to do a full renovation and re-rent when completed.
Once completed, I had another investor want to purchase the duplex. I decided to complete the deal and sold the duplex.
I’m told because I wasn’t renting, I can’t claim expenses. However, I only pulled renters out to upgrade the unit so I could have it a long time with little to no maintenance issues and renters would have a nice place.” Shawn
Tax deductions for investment property renovations
There may be tax implications for expenses you incur for real estate. Seniors may be able to claim federal or provincial tax credits for improving the safety of their home by claiming the Federal Home Accessibility Tax Credit or similar provincial tax credits. Families that create a secondary unit in their home may qualify for the Multigenerational Home Renovation Tax Credit.
Rental property owners can typically deduct property tax, insurance, interest, condo fees, repairs, utilities and other related costs. A rental property can even run at a loss allowing the taxpayer to claim deductions against their other sources of income.
Rental properties: Current vs capital expenses
There is a distinction between repairs and renovations for a rental property, Shawn. Repairs are referred to as current expenses, meaning they are deductible in the year incurred. Renovations are capital expenses that cannot be deducted immediately but can reduce your capital gain upon sale.
According to the Canada Revenue Agency:
A current expense is one that generally recurs after a short period. For example, the cost of painting the exterior of a wooden property is a current expense.
A capital expense generally gives a lasting benefit or advantage. For example, the cost of putting vinyl siding on the exterior walls of a wooden property is a capital expense.
The CRA provides guidelines for distinguishing between a current and capital expense, including:
- Does the expense provide a lasting benefit? If so, it is more likely to be a capital expense.
- Does the expense maintain or improve the property? If it is an improvement, it is more likely to be a capital expense.
- Is the expense for a part of the property or for a separate asset? If it is a separate asset, like an appliance, it is more likely to be a capital expense.
- What is the value of the expense? If it is high, it is more likely to be a capital expense.
- Is the expense for repairs made to a property in order to sell it? If the expense is in anticipation of a sale, it is more likely to be a capital expense.
A typical capital expense is a renovation to improve a property. In your case, Shawn, since the property was not being rented out due to renovations, some of your carrying costs, like property tax, insurance, interest, utilities and condo fees may be considered capital expenses, meaning you cannot deduct them.
What are soft costs? How do they treated?
According to the CRA, soft costs are the expenses incurred while renovating a property to make it more suitable to rent. These include the expenses above, as well as legal or accounting fees.
Soft costs may be deductible against your rental income, but the deductions are limited to the rental income earned. In your case, Shawn, they may be considered capital costs that increase your adjusted cost base and reduce the capital gain upon the sale of the property.
Capital gain or business income?
Another consideration, Shawn, is that if you bought, renovated, and sold the property, there is a risk your capital gain—which is only 50% taxable—is considered business income. Selling a property soon after purchasing it may be considered flipping, and the resulting business income is fully taxable.
You may not be able to deduct the carrying costs for the renovation period as current expenses, Shawn, but you should still save some tax by a reduction in the capital gain on sale at the very least.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.
