Having touched on the tax-deductible expenses, it is also important to know what expenses are NOT ALLOWABLE. Typically, initial expense is not allowed a deduction from income of letting of real property assessed under paragraph 4 (a) or paragraph 4 (d) of the ITA since that expense is incurred to create a source of rental income and not incurred in the production of rental income. Examples of such expenses include:
- Costs of obtaining the first tenant for the property, such as:
- Other expenses incurred prior to the property being rented out; or
- Renovation and improvement costs.
- materially add to the property’s value;
- substantially prolong its useful life;
- adapt the property to a new or different use; or
- enhance the property’s income-generating ability.
What happens during the period when the property is not rented out? As explained above, expenses incurred prior to the property being first rented out, are not allowable in calculating the adjusted income from the letting of that property. However, if the property which is previously rented out but left temporarily unoccupied while you are looking for the next tenant, the expenses incurred during the period of unoccupancy will still qualify for deduction. This is on the condition that the property is being consistently kept in a tenantable state and is ready to be let out at any time. How long then, can a property be ‘temporarily’ left vacant and yet the property expenses qualify for a tax deduction?
- repair or renovation of the building;
- absence of tenants for a period of 2 years after termination of tenancy;
- legal injunction or other official sanction; or
- other circumstances beyond the control of the person who lets out the real property.
Under the above circumstances, the expenses for the period the property is not let out are allowable, provided that the property is maintained in good condition and is ready to be let out. Of course, having explained the concept of tax-deductibility of expenses against rental income, one must never forget or ignore the underlying basis for claiming for a tax -deduction, ie. the need to keep proper records and documentation relating to the claim for those expenses. When it comes to a tax audit, the IRB’s basis of allowing you a tax deduction for the expenses claimed would all be about the availability of EVIDENCE.