In 2016, Johnny purchased a residential rental property (property #1) just north of Toronto. The property is rented to an arm’s length party for $3,600 per month. On January 1, 2020, Johnny transferred 50% ownership of the property to his wife Moira, since Johnny was annoyed that he was paying all this tax on the rental property. Johnny’s lawyers advised that Johnny could transfer the residential property at cost, so he wouldn’t trigger any tax. Johnny was also super happy to hear that Moira did not have to pay anything for her 50% share of the property either but could still have her name on title. Johnny took his lawyer’s advice.
Johnny and Moira purchased a second rental property (property #2) on February 1st, 2020. The building cost $800,000. They each own 50% of the property. Johnny and Moira each financed 50% of the down payment with their own funds and financed the remainder of the purchase price with a mortgage. They hope the mortgage payments are deductible for tax purposes. They found arm’s length tenant right away and rented the property beginning March 1, 2020 for $2,800 a month.
The annual expenses (for property #1) and March to December expenses (for property #2) are as follows:
Utilities $3,400 $4,200
Maintenance $5,000 –
Insurance $1,200 $1,900
Property Taxes $7,500 $9,500
Mortgage payments – $14,700
Interest on mortgage – $12,500
Maintenance expense for property #1 relates to general upkeep. The opening UCC for property #1 is $530,000.
It is now April 2021 and you are a CPA in the tax department of CPA LLP. The CPA LLP partner advising Johnny and Moira would like you to calculate the net rental income that should be included in each of Johnny and Moira’s 2020 tax returns. Show all calculations.