A real estate investor owns a rental property that generates $2,000 monthly rent. Which of the following expenses can be deducted for tax purposes?

Q: What is the correct answer to: A real estate investor owns a rental property that generates $2,000 monthly rent. Which of the following expenses can be deducted for tax purposes?

The correct answer is Property taxes, insurance, repairs, mortgage interest, and depreciation. Option B correctly identifies all major categories of deductible rental property expenses under Canadian tax law. The Income Tax Act allows deduction of current expenses incurred to earn rental income, including property taxes, insurance, repairs and maintenance, mortgage interest, and capital cost allowance (depreciation). These are considered reasonable expenses necessary for generating rental income. The CRA specifically permits these deductions as they represent the cost of doing business in the rental property sector, provided they are reasonable and directly related to earning rental income.

Q: What background knowledge is needed for this Real Estate Taxation question?

Under Canadian tax law, rental property income is treated as business income subject to specific deduction rules. The Income Tax Act permits deduction of current expenses incurred to earn rental income, including property taxes, insurance, repairs, mortgage interest, property management fees, advertising, utilities, and capital cost allowance (depreciation). However, mortgage principal payments and capital improvements are not immediately deductible. Capital improvements must be added to the property's adjusted cost base and depreciated through capital cost allowance. The Canada Revenue Agency provides detailed guidance on distinguishing between deductible current expenses and non-deductible capital expenditures.

Q: What is a good way to remember the answer to this Real Estate Taxation question?

Remember PRIME + D: Property taxes, Repairs, Insurance, Mortgage interest, Expenses (management/advertising), plus Depreciation. Think of a PRIME rental property that generates income - all these costs keep it in prime condition and earning money, so they're deductible. The 'D' for depreciation is the bonus deduction that makes the property investment even more attractive. When you see rental property tax questions, quickly run through PRIME + D to identify all deductible expenses. If an option is missing any of these elements, it's likely incomplete. If it includes non-deductible items like mortgage principal or capital improvements, eliminate it.

Q: What exam tip applies to this Real Estate Taxation question?

Look for the most comprehensive answer that includes both operating expenses AND depreciation. Eliminate options mentioning mortgage principal payments or immediate deduction of capital improvements, as these are common incorrect inclusions in wrong answers.

Q: How does this Real Estate Taxation concept apply in real world practice?

Sarah owns a duplex generating $3,000 monthly rent. At tax time, she can deduct her $4,800 annual property taxes, $1,200 insurance, $800 in repairs, $8,400 mortgage interest, $600 property management fees, and claim capital cost allowance on the building. However, her $2,400 in mortgage principal payments and the $15,000 kitchen renovation are not immediately deductible. The renovation increases her property's cost base for future depreciation calculations, demonstrating the practical application of these tax rules.

Question

Real Estate TaxationTax PlanningMEDIUM

A real estate investor owns a rental property that generates $2,000 monthly rent. Which of the following expenses can be deducted for tax purposes?

Answer Options

A

Property taxes, insurance, repairs, and mortgage interest only

B

Property taxes, insurance, repairs, mortgage interest, and depreciation

C

Only mortgage payments and major renovations

D

Property management fees and capital improvements only