Posted by Tiffany Gaskin

Tax Deductions Rental Property Owner Can Take

Tax Deductions Rental Property Owner Can Take

For everyone with real estate that they offer for rent, there is the potential for tax deductions besides the regular income it guarantees. 

However, the first step is to ascertain what type of real estate investor you are: a professional real estate agent or a passive investor.  Your exact classification can significantly affect the number of tax breaks you qualify for. 


Professional vs. Passive Investor 

For people that spend a large number of their work hours in the field as a real estate pro, the losses you get from renting cannot be classified as passive. As a result, you can fully deduct your losses against your income. 

On the other hand, people who have this as a side investment have passive losses with the capacity to deduct as much as $25,000 against their rental income. If the modified adjusted gross income (MAGI) revolves between $100,000 and $150,000, the deduction will phase out. You can carry losses above $25,000 over to the next year. 

According to Uncle Sam, a real estate pro is someone who dedicates over half of their working hours to the business. It can include any business face like construction, property development, acquisition, management, etc. Also, one needs to spend above 740 hours every year to qualify as a pro. 


Common Source of Income 

Rental income 

Whatever you get as rental is taxable in the year you got the money, not when it was due. As a result, you will treat an advance payment as income. 

For instance, assume you rent out an apartment for $500 a month, and you wanted every new tenant to sign a lease alongside payment of the first and last month. One needs to declare the $1000 as income in this case. 


Expense Paid by Tenant 

All other expenses that come from your renters are considered taxable income. Maintenance fees, and emergency repair done on the plumbing work in your absence can be deducted as a rental expense. 


Trade for Services

There are times a tenant will desire to exchange trade for services. One needs to record the market value of the services as an income. For instance, a tenant that offers to repair a clogged pipe in exchange for two months' rent (valued at $800) is essential to report the $800 as income even though there was no cash exchange. You, however, can deduct it as an expense.


Comparing Repairs and Improvements 

While rental property owners might assume that they can deduct any activity done on their property, the IRS does not agree. 

All expenses that go into getting a mortgage such as appraisals and fees cannot be deducted. 

The idea of a repair is to maintain your rental property's condition, which makes it a deductible expense when you paid for it. Simple repair works are things like mending a broken pipe painting, replacing a bad overhead tank, etc. 

On the other hand, when you improve, you add value to the property, which cannot be deducted. The way to recover the investment costs is to depreciate the expense over the property's life expectancy. Sample improvement could be a new garage door, a new roof, etc. 

For tax purposes, you are better at making repairs as soon as you discover any problem. This is better than waiting till the issue escalates and might require a significant renovation. 


Examples of Deductions 

Travel Expenses

Funds spent while on a trip for rent or to maintain the rental property can be deducted. Although if the aim of the journey was for improvement, you could only recover such expenses as part of depreciation and improvement.

There are two choices on deducting travel expenses: the rate for standard mileage and the actual expenses. You can get more information on the mileage allowance from IRS Pub 463.


Miscellaneous Examples 

You can also deduct some expenses alongside repairs and depreciation. A few of them are:

  • Taxes

  • Lawncare

  • Insurance

  • Casualty losses like a flood, tsunami, earthquakes, etc. 

  • Preparation fee for tax return



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Tiffany Gaskin
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