If you missed our last article on setting up a rental unit, take a look here.  Now that you’ve finished your renovations and successfully found a tenant, it’s time to talk about the fun stuff.

Making Money With Your Home

Depending on your mortgage, you’re hopefully now receiving a huge chunk (if not all) of your payment from your tenants. 

This is pretty incredible.  Your mortgage payment was probably your largest monthly expense, and all of a sudden it’s all but disappeared.

How NOT To Handle Rental Income

Passive income (as this mostly-is), can be a bit dangerous.  Because you didn’t slave away at an office for 40 hours a week, it can feel a bit like found money.  It would be so easy to treat this monthly bonus as just that – a bonus.  But you’re smarter than that.  Your whole reason for doing this was to pay off your home faster, and that’s exactly what you’re going to do.  So no ‘celebration’ or ‘let’s just use a bit of it for…’.  Take that money and immediately put it towards your mortgage.

How TO Handle Rental Income

You’ll have to look into your mortgage terms and figure out the best way to use this money.  It may make sense to make a monthly lump-sum payment with this money.  The benefit of this is that it will go directly towards your principal (as opposed to your regular payments which mostly go towards interest).  By knocking down your principal faster, you’ll pay much less interest in the long run.  Again this depends on how your institution calculates interest owed.

You could also call and have your monthly payment increased by the amount of your rental income.  This will make it automatic, but could be a problem if you’re ever out a tenant for whatever reason.

Other Benefits To Owning An Income Property

The benefits don’t stop at the cash coming in.  You’ll also want to take advantage of all of the tax opportunities afforded by running a home business and generating rental income. 

Start tracking all of your expenses, including the renovations, upkeep, and utilities.  Rental income is calculated separately from your regular income and any other home business income you’re claiming, so keeping separate receipts in important.  By looking at tax software like Ufile, you’ll get a quick idea of what types of deductions you can make.

A Word Of Caution With Taxes And Capital Gains

There are two ways to claim expenses with your rental unit.  Those are as a current expense and as a capital cost.  As a very general guideline, a current expense would be a repair on something that was broken.  A capital cost would be something like replacing a fridge.

The caution comes when claiming capital costs.  If you start claiming these, it’s possible it will affect you when it comes time to sell your home.  When selling your primary residence, you do not pay capital gains (income tax on the profit you made from the sale).  But if part of your home was a rental unit and you’ve claimed capital costs in the past, you may be on the hook for the capital gains from the percentage of your home that contained the rental unit.


Say you bought your home for $300,000 and rent out the basement (a third of your home).  A few years later you sell for $400,000.  If you hadn’t claimed any capital costs you wouldn’t pay any income tax on your $100,000 profit from the sale.  If, on the other hand, you HAD claimed capital costs, you may be forced to pay income tax on the portion of the profit.  That would be 1/3 of $100,000, or $33,000.  On a 30% tax bracket you could lose up to $10,000 in taxes.

This is why it’s absolutely crucial to do your research and/or speak to a professional ahead of time (don’t wait until it’s time to sell – that’s too late!).