Real estate investing can be a lucrative way to build wealth and generate passive income. However, it’s important to understand the tax implications of real estate investing in Toronto. As with any investment, taxes can significantly impact your bottom line.
Here are some important tax considerations for real estate investors in Toronto:
- Rental Income
If you own a rental property in Toronto, you’ll need to report any rental income on your tax return. This includes rent received from tenants, as well as any other rental-related income such as pet fees or laundry revenue. You’ll also need to report any security deposits you receive from tenants, although these deposits are not considered taxable income.
You’ll be able to deduct certain expenses related to your rental property, such as property taxes, insurance, repairs and maintenance, and mortgage interest. However, keep in mind that the Canada Revenue Agency (CRA) has strict rules around what can and cannot be claimed as a rental expense. It’s important to keep accurate records and consult with a tax professional to ensure you’re claiming all eligible expenses.
- Capital Gains Tax
When you sell a property, you may be subject to capital gains tax. This tax applies to the profit you make from the sale of the property. In Canada, only 50% of capital gains are taxable, meaning that if you make a $100,000 profit on the sale of a property, only $50,000 will be subject to tax.
It’s important to note that if the property was your primary residence, you may be eligible for the principal residence exemption, which can eliminate or reduce your capital gains tax liability. However, if you’ve rented out the property at any point during your ownership, only a portion of the gain may be eligible for the exemption.
- HST
In Ontario, new homes and condos are subject to the Harmonized Sales Tax (HST). If you’re purchasing a new property for the purpose of renting it out, you may be eligible to claim a portion of the HST paid as an input tax credit (ITC) on your tax return. However, if you’re purchasing a property for personal use, you won’t be able to claim any portion of the HST as an ITC.
- Land Transfer Tax
When you purchase a property in Toronto, you’ll be subject to a land transfer tax (LTT). The amount of LTT you’ll pay depends on the purchase price of the property, with higher-priced properties subject to higher LTT rates. In addition to the provincial LTT, Toronto has its own municipal LTT, which is added on top of the provincial tax.
It’s important to factor LTT into your purchasing budget, as it can add a significant amount to your closing costs. However, if you’re a first-time homebuyer in Ontario, you may be eligible for a rebate of up to $4,000 on the provincial LTT, and up to $4,475 on the Toronto municipal LTT.
- Mortgage Interest
If you have a mortgage on a rental property, you can deduct the interest paid on that mortgage as an expense on your tax return. This can help to reduce your taxable rental income. However, keep in mind that mortgage interest is only deductible on rental properties, not on personal residences.
- Non-Resident Tax
If you’re a non-resident of Canada and you own real estate in Toronto, you may be subject to a non-resident tax on any rental income you earn from that property. The non-resident tax rate is 25% of the gross rental income, and it’s withheld by the tenant or property manager and remitted to the CRA.
It’s important to work with a tax professional who can help you navigate the complex tax rules around real estate investing in Toronto.