AS THE PRICE OF NEW HOMES continues to rise, one option for some first-time home buyers is to purchase a property that contains a basement apartment. This extra" space can be rented out in the early years of ownership and provide an additional monthly income that will come in handy in making the required mortgage payments.
Of course this option is not only available to purchasers of new homes. Existing home owners may also wish to rent out a portion of their dwelling in order to generate additional cash flow. However, they may have to undergo significant renovations to their property in order to allow the residence to accommodate a tenant. This article will examine the factors that you should consider when renting out your basement. The extra dollars generated from the rental are always appreciated, but it is the other costs that must be weighed to determine if this is a viable alternative for you.
The first priority in renting out a portion of your home is that the residence continues to meet all fire and safety regulations of the local municipality in which you live. Some areas require that the basement apartment have a separate entrance/exit to the house in case there is a fire, while others do not. Other bylaws cover such factors as the natural light and ventilation that is available "downstairs", the provision of both a washroom and kitchen, and the required height of the unit in question. If these factors are not addressed, the prospective landlord will have to apply for a city building permit and have the residence renovated to conform with local ordinances. The required work may be costly, but the penalty for violating fire code regulations can be very steep.
The second consideration in renting out part of your home is whether you will be willing to trade off the privacy of your home and the certain standard of living which it affords, with the monetary return that can be generated on using existing, under-utilized space in your home.
A third consideration, often pertaining to older home owners whose children have "left the nest", is the peace of mind of having tenants on the property to provide a greater sense of security should anything go wrong around the house or to the owners themselves who may otherwise be living alone.
As far as income tax considerations are concerned, the rental revenue generated must be reported. However, you will be allowed to deduct a percentage of the expenses incurred in maintaining your rental unit. Thus, if you rent out one-third of your home, an equivalent percentage of your home insurance, mortgage interest, repairs and maintenance, property taxes, utilities and other related costs (such as advertising) of the rental can be applied against the revenue generated. In cases where extensive renovations had been required or certain long term outlays had been necessary to make the apartment rentable, such expenditures may be "written off" over a period of years and applied against revenue generated according to certain guidelines as set out by Revenue Canada. This is termed Capital Cost Allowance. The resulting income or loss will be picked up on your personal income tax return for the year and included with all other incomes earned in the calendar year. In the year that you sell your home, a percentage of the capital gain generated from the appreciation of the propertys value over the term of its ownership must be calculated and included in income if capital cost allowance as outlined above, had been taken. If not, the entire gain will be tax free as are all principal residences of Canadian taxpayers.
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Associates. All rights reserved.