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In real estate investing, your taxes depend on whether you're a partner or co-owner
Q. I own a rental property with two other people. Do all three of us claim the property rental income and expenses on our taxes? Is it split three ways, or can just one of us claim it? We live in Ontario
– Thank you, Maude
A. Maude, how the income gets taxed to each owner will depend on where the actual capital originated (did you each invest equal amounts of money?) and whether CRA considers you to be co-owners or partners.
If you are co-owners, then the gross rent is allocated to each co-owner according to each person’s share of invested capital. Expenses are then allocated in the same manner unless expenses are paid personally by any of the co-owners; in which case that person will claim more on the tax return for those items.
Co-owners may then claim depreciation (Capital Cost Allowance or CCA in tax lingo) against their net rental income, individually. With a rental property, it is not possible to create or increase a loss with a claim for CCA unless the co-owner has other rental properties that show net income.
If the owners are partners, then the net rental income must be allocated to the partners according to the partnership agreement. Normally, this would be an equal share to each partner if they made equal investments. However, the agreement may split the income in any other way. The reporting of the income must match this allocation. Depreciation is claimed at the partnership level in this case, so partners are not free to choose their own level of depreciation. Any expenses paid personally by a partner may be claimed against their portion of the net rental income.
If any of the partners are spouses with another partner or dependent children, the Attribution Rules may require that income allocated to one spouse (or minor child) be reported by the person who supplied the funds. Here’s an example:
A property is owned by John, his wife Mary and his brother Bob. Bob provided $50,000 of the down payment, Mary provided $10,000 and John provided $90,000. The partnership agreement says that net income will be split equally amongst the partners.
READ: When two people are on a condo title, who pays capital gains?
However, because John provided 90% of the investment made by him and his wife, 90% of the net income allocated to the spouses must be reported by John, as per the Attribution Rules. If the rental property netted $3,000 income in the current year, an allocation of $1,000 would be made to each partner per the partnership agreement. However, for income tax purposes, John must pay taxes on 90% x 2/3 x $3,000 = $1,800 and Mary would only pay taxes on the remaining $200.
Once again, professional help should be sought with these transactions. Rental property reporting is often audited, especially when repairs and improvements are made, so be sure you have receipts and formal agreements in place.
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If I own a summer property with someone else, is it an automatic that taxes should be shared?
Hi Bobby, thanks for the question.
Due
to the large volume of comments we receive, we regret that we are unable to respond directly to each one. We invite you to email your question to [email protected],
where it will be considered for a future response by one of our expert columnists. For personal advice, we suggest consulting with your financial institution or a qualified advisor.
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