Can You Deduct Carrying Costs During Construction?

Buying a property to rent out can be a great way to build long-term wealth — but the months (or even years) between purchase and your first rental payment often raise a big question: what happens to the expenses you pay before earning a single dollar?

These ongoing costs — often called carrying costs — can add up quickly. Mortgage interest, property taxes, utilities, insurance, and maintenance continue even when the property isn’t yet producing income. The challenge is that the Canada Revenue Agency (CRA) treats these costs differently depending on whether your property is considered income-producing at that point in time.

Understanding how to handle carrying costs properly can make a significant difference at tax time — and help you avoid reassessment later.

1. What Are Carrying Costs?

Carrying costs are the ongoing expenses you incur to hold a property during periods when it’s not generating income. These may include:

• Mortgage or construction loan interest

• Property taxes and utilities

• Insurance premiums

• Maintenance or security expenses

• Condo or association fees

Even if your property is still under construction, these costs don’t pause — which makes proper classification important.

2. The CRA’s Guiding Principle: “Used to Earn Income”

Under Section 18(1)(a) of the Income Tax Act and CRA Interpretation Bulletin IT-128R, only expenses incurred for the purpose of earning income are deductible.

If your property is still being built or undergoing major renovations, it’s not yet considered income-producing. In that case, most carrying costs must be capitalized — added to the property’s cost base rather than deducted right away.

3. When You Can Deduct Carrying Costs Immediately

Carrying costs are generally deductible if your property:

• Is ready and available for rent;

• Requires only minor cosmetic work (e.g., painting, cleaning, replacing fixtures); or

• Is actively being marketed for tenants.

At this stage, your property is considered available for rent, meaning it could reasonably generate income.

4. When You Must Capitalize Carrying Costs

You must capitalize carrying costs when the property is:

• Still under construction or major renovation;

• Being built from the ground up;

• Undergoing conversion from personal use to rental use.

These capitalized costs are added to your adjusted cost base (ACB) — effectively deferring the deduction until you sell the property.

Example: How Capitalization Affects Taxes

Let’s say you buy a new rental property for $700,000, and while it’s under construction, you incur $23,000 in carrying costs.

Your adjusted cost base becomes $723,000.If you sell later at $900,000, your taxable capital gain is calculated using the higher ACB — which reduces the gain and, ultimately, your taxes owed.

5. For Investors Preparing a Property for Rental

If a property is bought with the intent to rent but isn’t yet ready, the CRA treats it as non–income-producing until it becomes available for rent.

A property is typically considered available for rent when renovations are complete, utilities are active, and the unit is listed or shown to potential tenants. Carrying costs incurred before this point are capitalized; those incurred afterward become deductible.

6. Common Mistakes Investors Make

• Claiming deductions before the property is rental-ready

• Failing to track the timeline between purchase and listing

• Mixing personal and rental expenses

• Assuming pre-construction condo interest or deposits are immediately deductible

• Forgetting to use capitalized costs to reduce future capital gains

7. Practical Tips for Compliance

To stay compliant and tax-efficient, investors should maintain detailed records of all carrying costs, clearly noting the date and purpose of each expense. It’s also important to separate pre-rental expenses from those incurred once the property becomes available for rent, as the CRA views them differently. Keep documentation showing when the property was first listed or marketed—such as agent agreements, listing screenshots, or correspondence with potential tenants—to help establish when deductions become allowable. Finally, work closely with your accountant to confirm when to stop capitalizing costs and begin deducting them, ensuring that your tax filings accurately reflect your property’s transition into an income-producing asset.

Investor Takeaway

Carrying costs are part of every investor’s journey — but timing is everything.If your property isn’t yet available for rent, capitalize those costs. Once it’s ready and marketed, they become deductible.

Accurate record-keeping and clear timelines will help you stay compliant, optimize your tax position, and protect your long-term returns.