Question 101 - Jordan Bennett - Solution

Correct answer: A. Rent and utility reimbursements are included in gross rental income; mortgage interest and repainting are generally deductible current expenses; hardwood flooring is a capital expenditure; claiming CCA may reduce current taxable income but could lead to recapture later.

“Choice A is true.” Gross rental income generally includes rent received and amounts paid by tenants on the owner’s behalf, such as utility reimbursements. Mortgage interest and repainting are typically current expenses because they relate to financing and maintaining the property. Replacing laminate flooring with hardwood generally improves the property and is therefore a capital expenditure. CCA may reduce current taxable rental income, but previously claimed CCA may be recaptured if the property is later sold for a sufficient amount.

“So, choice A correctly identifies gross rental income items, distinguishes current expenses from a capital expenditure, and explains a key advantage and disadvantage of claiming CCA.”

“Choice B is false.”  Tenant reimbursements for utilities generally form part of gross rental income. Mortgage interest is normally a deductible current expense rather than a capital expenditure. Upgrading laminate flooring to hardwood is generally considered a capital expenditure because it improves the property. In addition, claiming CCA may result in recapture later, so the tax benefit is not necessarily permanent.

“So, choice B incorrectly excludes utility reimbursements from gross rental income, misclassifies expenses, and overstates the benefit of CCA.”

“Choice C is false.” Utility reimbursements are generally included in gross rental income. However, repainting is usually a current expense because it restores or maintains the property, whereas upgrading flooring to hardwood is generally a capital expenditure. Furthermore, CCA is optional rather than mandatory.

“So, choice C incorrectly classifies repainting and flooring costs and incorrectly states that claiming CCA is mandatory.”

“Choice D is false.” Utility reimbursements received from tenants are generally included in gross rental income. Repainting is usually a current expense, but upgrading flooring to hardwood is generally a capital expenditure because it improves the property beyond its previous condition. Mortgage interest is generally a current expense. In addition, CCA cannot be used to create or increase a rental loss.

“So, choice D incorrectly excludes part of gross rental income, misclassifies expenses, and incorrectly describes the limitation on claiming CCA.”