You may have certain costs relating to the period you were
constructing, renovating, or altering your rental building to
make it more suitable for renting. These expenses are
sometimes called
soft costs. Soft costs include:
- interest;
- legal fees;
- accounting fees; and
- property taxes.
Soft costs attributable to the period of construction,
renovation, or alteration of a building are made up of the
soft costs relating to the building and those pertaining to
the ownership of the related land and attributable to that
period. The building's related land consists of the land:
- that is under the building, or
- that is immediately adjacent to the land under the
building; used or intended for use for a parking area,
driveway, yard, garden, or any other similar use; and
necessary for the use or intended use of the building.
Soft costs pertaining to a building's related land and
attributable to the period of construction, renovation, or
alteration are not deductible but can be added to the cost of
the building. However, soft costs related to a building may
be deductible as a current expense or added to the cost of
the building, depending on your situation.
Soft costs related to the building may be deductible as a
current expense if:
- the costs relate to the period you were constructing,
renovating, or altering the building; and
- the costs relate only to constructing, renovating, or
altering the building.
We consider the period of construction, renovation, or
alteration to be completed on whichever date is earlier:
- the date the work is completed; or
- the date you rent 90% or more of the building.
When these conditions are met, the amount of soft costs
related to the building that you can deduct is limited to the
amount of rental income earned from the building.
Soft costs that do not meet the above conditions are not deductible as
a current expense. Add them to the capital cost of the building and not the land.
Since CCA, landscaping costs, and costs for disability-related
modifications to buildings are not soft costs,
they are not subject to the soft cost rules.