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Originally Posted by mustache ride
I have always been instructed that the principal paid on the mortgage is considered profit and gets added to the net income from the rental at the end of the year. This is the number i have always been taxed on.
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This is 100% wrong. Let's suppose a situation where your marginal tax rate is 30%, and you prepay your mortgage on your rental property by $50,000. In what world does it make sense that you should have to pay $15,000 in taxes because you paid down the principal of your outstanding debt? It doesn't make any sense.
Quote:
Originally Posted by mustache ride
They added my personal return to the rental return. I would have a refund of $8400 without the CCA and $10,000 with the CCA. The rental was quoted around $600 owed in taxes so what else what else would explain the difference in amount?
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It may sound like splitting hairs, but your net rental income is added to your personal return, as long as you hold it personally. First off, if your personal return is $8,400, you have done some horrible tax planning. You should never want a refund that high, as you are just giving the government an interest free loan. Assuming a normal distribution, you are cheating yourself of an extra $800 per month that you could be spending, saving and/or investing.
Let's suppose without your rental, you are entitled to an $8,400 refund. Assuming a 25% marginal tax rate, your net rental income is $2,400, which gives rise to the $600 taxes owing. This should drop your refund to $7,800. If you take CCA, as explained it can't push you into a net rental loss. Your refund would stay at $8,400. There is likely something missing from your story and/or the accountant is doing something wrong. The key point here is you can pay taxes on your net rental income, at your marginal tax rate, on the amount before CCA. If you take CCA, it can only go up to your net rental income. No matter what you do with CCA, it will never give you a bigger refund than as if you didn't have a rental property.
Quote:
Originally Posted by mustache ride
This could have just been me not understanding but how is the useful life of a rental property determined?
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Based on what has been explained to me in the thread, it sounds like you are understanding it properly as explained to you, but the person explaining it to you doesn't understand what is right and wrong. I'd recommend giving Locke a shout. His fees will be offset by the comfort in knowing your taxes are correct, and you won't be on the hook for large fees, penalties, interest, and back taxes.