Posted by Fletcher Accounting and Tax Service Inc.

Rent out Your House and Get These Good Tax Breaks

Rent out Your House and Get These Good Tax Breaks

Millions of landlords have to pay more on their rental income taxes every year. Owners of rental properties have tax deductions available but some landlords fail to take advantage with all of it. Compare to other investments, rental real estate provides more tax benefits.

Losing money and earning a profit on a rental estate have some difference in regards to the benefits. Below are the top ten tax deductions for landlords of small residential rental property.

1. Interest

A landlord’s single biggest deductible expense often is the interest. Mortgage interest payments on loans used to obtain or refine rental property and credit card interest for goods or services used in a rental activity are some common example landlords can deduct. The Tax Cuts and Job Acts started in 2018- limited the deduction of interest for landlords who earn more than $25 million from their rentals. By agreeing with depreciating the value of their rental property over 30 years than 27.5 years, such landlords can avoid the limit. 

2. Rental Real Property Depreciation

The year in which you pay for it is not fully deductible with the actual cost of a house, apartment building or other rental property. The cost of real estate through depreciation will revert back to the landlords instead.  It will include several years of deducting a portion of the cost of the property. 

3. Repairs

In the year in which the repair incurred, the cost of repairs to rental property is fully deductible provided the repairs are typical, essential and reasonable in amount. Deductible repairs, for example, include repainting, fixing gutters or floors, fixing leaks, plastering, and replacing broken windows. 

4. Personal Property

Using the de minimis safe harbor deduction (for property costing up to $2,000) or 100% bonus depreciation which will remain effective for 2018 through 2022, the cost of personal property used in a rental activity can usually be deducted in one year. Appliances or furniture in rental units and gardening equipment are included in such personal property. 

5. Tax Deduction Pass-Through

Established by the Tax Cuts and Jobs Acts that started in 2018, most landlords qualified for a new pass-through tax deduction. This is not a rental deduction but a special income tax deduction. Landlords may be able to deduct from their net rental income (1) up to 20%, or (2) 2.5% of the initial cost of their rental property plus 25% of the amount they pay their employees but mostly depends on their income. After 2015, this deduction is scheduled to expire. 

6. Travel

Most of the driving landlords do for their rental activities they are entitled to a tax deduction. You can deduct your travel expenses for example if you will go to the hardware to purchase a part for a repair or when you drive to your rental building to address your tenant’s complaint. The expenses you have in traveling to improve your rental property must be added to property’s tax basis and depreciated over many years. 

You have two options for deducting your vehicle expenses if you drive a car, SUV, a van, a pick-up or a panel truck for your rental activity. You can either deduct your actual expenses (maintenance, gasoline, repairs) or use the standard mileage rate (for current rates, check the IRS website). You must use your car in the first year you use a car for your rental activity to qualify for the standard mileage rate.

You can deduct your airfare, meals, hotel bills, and other expenses if you travel overnight for your rental activity. You can even mix pleasure with landlord business and still take a deduction as long as you plan your trip carefully. 

Many taxpayers get caught claiming these deductions but have no definite proof of records to back up their claim since IRS auditors are very thorough with deductions for overnight travel. You need to document your long distance travel expenses properly to avoid unwanted attention from the IRS and to stay within the law. 

7. Home Office

Landlords may deduct their home office expenses from their taxable income if they meet certain minimal requirements. The deduction applies to a workshop or any other workspace you use for your rental business not only to space devoted to office work. Whether you are a renter or you own your home or apartment, it doesn’t matter. 

8. Independent Contractors and Employees

You can deduct the wages as a rental business expense if you will hire anyone to perform services for your rental activity. Whether the position of the employee you hired is an employee (a resident manager for example) or an independent contractor (a repair person for example). 

9. Insurance

For almost any insurance for your rental activity, you can deduct the premiums you pay for it. This includes theft, fire, rental property flood insurance, and landlord liability insurance. You can deduct the cost of health and workers’ compensation insurance if you have employees.

10. Legal and Professional Services

Fees that you pay to attorneys, accountants, property management companies, real estate investment advisors, and other professionals- you can finally deduct them. As long as the fees are paid for work related to your rental activity, then you can deduct these fees as operating expenses. 

Other Things You May Not Know About

  • The first few years they own rental property, landlords can greatly increase the depreciation deductions they receive by using cost segregation.
  • The cost of improvements to a rental property that you would have to deduct over 27.5 years can be deducted in a single year with careful and thorough planning. 
  • In some cases, you can rent out a vacation home tax-free!
  • In rental property losses, most small landlords can deduct up to $25,000 each year.
  • No matter how much, some landlords are permitted to deduct 100% of their rental property losses every year according to a special tax rule. 
  • All tax deductions of the people who rent property to their family or friends might cease virtually. 

There is a high possibility that you are paying far more tax than you need to if you didn’t know one or more of these facts.

Fletcher Accounting and Tax Service Inc.
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