With tax-paying season already at the door, it is important for property managers to be familiar with the how’s and when’s of paying taxes on real estate property or rental income. These are the two main categories of taxes that property owners or managers must pay attention to (apart from their personal taxes, of course). Though there are very specific criteria for the different regions in North America and Europe, there are also some general guidelines that are useful for figuring out what needs to be done.
Taxes on Real Estate in the U.S.
Taxes on Real Estate in the U.S. vary from State to State (see for example the NYS’ Department of Taxation and Finance website). Each State has the right to apply whatever rate it deems fair, as long as it does not violate decisions of the Federal Government. Taxes on property are a combination of the value of the property – which is its fair market value – and the tax rate of the county. The value of the property is rated by an assessor, an elected or appointed official, and is made through comparison of the market value of similar properties, instead of assessing each individual property. And just as in Canada, such assessments are made every few years depending on the State and the counties. Some States also permit real estate tax to be separated into a land value tax and a building value tax. Since taxes from real estate are used to fund public services, local governments can increase the assessment value of properties, instead of increasing the rate, which effectively results in higher taxes.
Luckily, real estate taxes can be deducted when calculating personal income tax, if such real estate taxes go toward general public welfare, are based on the property’s assessed value and all properties in the area are taxed at the same rate. The IRS Tax Topic 503, “Deductible Taxes” contains information on which types of taxes are deductible and on what conditions. When deducting real estate taxes from personal income taxes, a 1040 long form has to be used and Schedule A.
Tax on Rental Income in the U.S.
All amounts which are received as rent must be included in the gross income. All payments received for the use of occupation or property count as rental income. Just as with real estate tax, expenses of renting property can be deducted from the gross rental income. Rental expenses should be deducted in the year they are paid. Publication 527, Residential Rental Property includes information on the expenses that can be deducted. The relevant form for reporting income or loss from rental real-estate is Schedule E, Supplemental Income and Loss. The IRS website also provides additional information on when and how rental income tax should be paid, depending on whether cash or accrual method of taxation is applied.
Property Tax in Canada
One of the main sources of income for municipal governments is the money raised from property taxes. These are collected from property owners on an annual basis. The amount of property taxes is generally determined by two factors: the location of the property and its value. The type (tax class) of a property is also a factor in making out what amount is due. For example, different tax rates exist for residential, commercial or industrial property.
The value of property is usually determined by a central agency which is responsible for the entire Province. For example, the Municipal Property Assessment Corporation (MPAC) is responsible for sending yearly Property Assessment Notices to property owners in Ontario. MPAC follows a four-year assessment cycle, which means that they re-assess property once every four years. Property is assessed at its market value on the particular valuation date. According to the assessment, municipalities apply a specific tax rate to the property. If a property owner finds that the assessment is incorrect, he or she can usually make an appeal to the respective institution responsible for it. Furthermore, if changes occur in the status of the property – such as damages, change in use or others, a notice usually is due to the Tax office, so that adjustments to the property tax are calculated. This is also valid for properties that undergo improvements, additions or a change in tax class. With these, an additional Notice of Supplementary Assessment is usually issued.
Payments on property tax are generally paid to the local authority or municipality. Some provinces also offer schemes for the payment of taxes. Payments can be made at once or spread out over a number of installments. Additionally, property owners should take heed that penalties can be applied for late payments.
Tax on Rental Income in Canada
A second type of tax to be considered by owners of managers or property is the tax on income they make from renting properties. This includes income from renting all sorts of property – houses, apartments, rooms, office spaces and other. The first thing to consider when calculating the rental income is whether the income is from property or from business. In a nutshell, this can be determined by considering how many and what type of services you offer to your tenants. Basic services such as heat, water, lightning, parking, laundry, etc. fall within the category of property, while additional services such as cleaning, security or food are within the category of business. More detailed information about this is available in the IT434R – Rental of Real Property by Individual guide.
The relevant form which you should use when filing a statement of rental income is the Form T776, Statement of Real Estate Rentals. You are supposed to complete only the areas of the form that apply to you, in order to calculate your rental income or loss. Furthermore, if you have any doubts about your property and how to fill in the form, you can always consult the respective section of the Canada Revenue Agency‘s website.
Making sure that you are aware of all the taxes that are due is the best way of avoiding penalties as well as being on top of your income and expenses. Luckily, all the information that you need can usually be found online, on the website of your municipality, province, county or state, as well as on the websites or the relevant institutions.