This time of year, it’s impossible to avoid thinking about income tax. Savvy investors understand that a diversified portfolio is usually key to making money, and many are turning to real estate to round out their initiatives. It’s the old “don’t put all your eggs in one basket” philosophy. Owning a rental property can be a stable and lucrative practice for numerous reasons. For one, wise investors know that putting their funds into a property that will increase in value over time is important, and in today’s market, that’s pretty much a given. Relatively speaking, even with current prices, if you can eventually sell at a higher price, then you are buying “low.”

Smart investment

Real estate is also easy to get into if you have the down payment. Everyone understands owning a property, as opposed to buying stocks, RRSPs and mutual funds, which in essence, represent owning something on paper. Banks also realize that owners of rental properties enlist renters to pay their mortgage debt and earn equity, so are eager to lend money to potential landlords. Of course, the best scenario is that rental income exceeds your mortgage payment on the property plus related expenses – making it cash-flow positive. With the average rent in Toronto hovering around $1,900, that’s an achievable goal.

For a smart investment, it is important to understand all the parameters that come along with renting out your property, including the tax implications. Canada Revenue Agency offers guides to taxation for owners of rental property at canada.ca, and they are well worth consulting if you are considering real estate investment, either on your own or with a co-owner(s). These guides cover everything from determining whether the income you earn is considered rental or business income, to what you can and cannot deduct.

Do your homework

For example, you can write off related expenses such as interest and bank charges, repairs and maintenance, advertising, management and administration fees, travel costs and property taxes, to name just a few. You cannot deduct land transfer taxes, utilities paid by you, mortgage or loan principal repayments, penalties shown on your notice of assessment or reassessment, or the value of your own personal labour.

You must also be realistic about the work involved in bookkeeping, property maintenance and dealing with renters. Every province has its own regulatory body that protects the rights of tenants and outlines the responsibilities of landlords. You can find the Ontario rules at ontario.ca.

Overall, real estate is considered a relatively safe investment in ever-changing economic conditions, especially when it rounds out a well-thought-out financial portfolio. As with all real estate purchases, the more equipped you are with information, the more likely you are to make a wise deal. Do your homework, play by the rules, deduct what you can and pay your fair share of taxes – and owning a rental property may be the best move you ever make.