Posted by The TaxAdvocate Group, LLC

Rental Properties Ownership & Tax Deductions

Rental Properties Ownership & Tax Deductions

A rental property can be an excellent source of income and also offers attractive tax benefits.

By making deductions for rental costs, you can reduce the amount owed to the IRS each year. And the higher your tax level, the more valuable these write-offs can be.

To get all the allowable deductions, you need to know what deductions are available and the rules for claiming them.

Here are some rental tax deductions you need to know, along with some costs you may not be able to deduct:


Some real estate rent tax deductions you should know

The good news is that you can benefit from the following rental income tax deductions, both the standard deduction and itemized deduction. This also applies to expenses with limited deductions from personal income, such as property taxes.

The IRS treats rental income differently from other types of income, such as labor income and dividend income. So even if you can't deduct the interest on your home loan, you can still deduct the interest from your rent.


Mortgage Interest

If you take out a loan to finance the rent, you can deduct mortgage interest.

Be careful, however, if you refinance your rental property in cash. If you use some of this money for unrelated purposes, such as paying off consumer debt, the interest on that portion of the loan will not be deductible.


Property taxes

Buying rental property means paying property taxes - these are ongoing real estate expenses. The money goes to the local administration, which allocates it to things that benefit the inhabitants of the region. Think about rehabilitating roads, maintaining parks and public schools.

Whether or not you like the way your money is spent, you have to pay property taxes. Otherwise, the tax authorities can confiscate your property and put it up for auction.

 

Depreciation

Depreciation refers to a natural decrease in the value of property, plant, and equipment over time due to normal wear and tear. It also refers to an IRS rule that requires homeowners to write off a small portion of the asset's value each year until the asset becomes unnecessary and you deduct the full cost from it. This asset can be the facility and all capital improvements, but not the land.

Depreciation rates are dependent on the type of property to be depreciated.

  • Fences, sidewalks, and landscaping: 15 years

  • New household appliances, floors, and furniture: 5 years

  • Rental structure: 27.5 years

You can request depreciation from the date the property is ready to rent. If you buy a home and take time to improve it, you won't be able to claim depreciation immediately. However, you can deduct the management and maintenance costs of the rental property during this period.

Depreciation can save you money now, but it can lead to more taxable income later. When you exchange or sell your property, depreciation will reduce your cost basis.

You can offset this gain by adding the value of the improvements to the cost basis.


Repairs, maintenance, and cleaning

Repair, maintenance, and cleaning costs are deductible expenses. Ensure you are in sync with the Internal Revenue Service (IRS) for items you think fall into this category. If improvements are planned, you will have to write them off.

Tip: A good rule-of-thumb for budgeting for annual maintenance and repair costs is to allocate 1% of the property's value. So if your rental estate is worth $300,000, you would have a budget of $3,000 per year for repairs. Save money that you don't spend in a given year for years to come.


Insurance premiums

Homeowners can deduct a year's insurance premiums as an expense for renting out the property in the year they pay them. It is impossible to pay premiums in advance for subsequent years as a strategy to increase deductions in any given year.

Fire, theft, flood, earthquake, and civil liability insurance are deductible. If you have a loss that your insurance does not cover, you can claim it as loss or theft.


Professional services

A personal approach to all aspects of a rental property can be more than what you can afford. By relying on the experience of others, you will save time. And while it will cost you upfront, some expenses, such as property administration fees, may be tax-deductible. Plus, if you do it right the first time, you can save money in the long run.

You can use and deduct the services of professionals like:

  • Lawyers

  • Accountants

  • Tax preparers

  • Property management company

  • Real estate agent


One exception: when you employ the services of a professional to defend or protect your property, to repossess your property, or to develop or improve your property, you must add these taxes to your property basis. You cannot deduct them.


Advertising

As a homeowner, you may need to pay an online listing fee to promote your rental. You can also advertise in the newspaper or buy a sign to place in the garden. Such expenses are common and necessary when you own a home, so they are tax-deductible.

Supplies

If you like to do it yourself, it may be necessary to purchase various consumables to maintain the rental property: cleaning products, paints, air filters, etc. You can also purchase these items even if you hire someone else, such as an independent contractor, to do the actual work. You can deduct these expenses from the rental income.


Utilities

Tenants are generally responsible for their bills. But sometimes, homeowners pay for utilities. Tenants can reimburse landlords directly for these expenses, or landlords can include leased utilities.

Either way, if you pay for your utilities as a landlord, you can deduct them from your tax return.


Office Space

Whether you rent a home office or have an office, the fees you pay are deductible. Also, you can deduct associated expenses, such as printer ink, internet service, and office utilities.

If you want to request a home office downsizing, keep in mind that space only matters if you use it exclusively and regularly for work. However, it doesn't have to be a full room. A corner of your lair is eligible until you don't use it anymore.


Travel

You can deduct local travel expenses between your home and your rental property if your main place of business is your home office. Local travel expenses for rental, maintenance, and management of the property are also deductible. You can deduct exact expenses, or the standard IRS mileage rate, 2021, is 56 cents per mile.


Disclaimer: Overnight travel gives you the option of making several real estate investment deductions for expenses such as airfare, transportation, and meals, accommodation, but be sure to keep good records.

The Internal Revenue Service recognizes that some people try to claim deductions for business expenses in this category, including personal expenses.


What You Can't Deduce

Some costs that may seem deductible aren't deductible, so don't be fooled by your first instincts when it comes to lowering rent taxes. In addition to the exceptions mentioned, here are some rental charges that you cannot deduct:

  • Housing points or taxes that you paid for your mortgage: you must deduct them during the entire term of the loan; you cannot deduct them in the year you paid them.

  • Improvements and travel costs related to improvement: You must recover the cost of improvements through depreciation. Examples of improvements include adding a room, replacing the roof, and insulating the attic.

  • Rent lost during vacancies: If your property is unoccupied for some time, you cannot deduct the amount of rent that would have been earned during that time if it had been occupied.

  • Transportation costs: if you do not have a home office, driving from the house to the rental property is not considered local travel; it is a transportation expense.

  • Unpaid Rent: If your tenant stops paying rent, you won't be able to deduct the lost rent (unless you use accrual accounting instead of cash accounting). This rule makes perfect sense, as you also don't owe the rental income tax you never receive.

Consider hiring a tax professional to help you avoid errors on your return. Through a lawyer's experience, you can also learn about deductions to save lost money.


How to claim tax deductions on rental properties

To claim tax deductions for rental property, you will need to submit the following forms with your annual tax return, which is Form 1040 or one of its variations:

  • Use Schedule E to claim tax deductions for rental properties.

  • Use Form 4562 to request depreciation of assets placed in service during the fiscal year.

  • Use Form 4684 to report accidental loss or theft involving your property.


Tax deductions aren't the only way to save money when you own a rental property. To reduce operating costs, you can refinance your rental property. With a low interest rate, you can lower your monthly fees and free up money for other things.


FOR MORE INFORMATION ON HOW THE TAXADVOCATE GROUP, LLC. CAN BEST HELP YOU WITH YOUR TAX FILING NEEDS, PLEASE CLICK THE BLUE TAB ON THIS PAGE.


THANKS FOR VISITING.

The TaxAdvocate Group, LLC
Contact Member