Deciding to become a landlord can be highly beneficial for you financially. However, it also comes with a significant amount of work.
As well as the general responsibilities associated with running a rental property, you need to find tenants, pay all your expenses, and ensure you have insurance.
In personal tax terms, renting out a property can complicate the situation. There are rental property tax deductions available to help you out with running your business, though.
Different deductions are available from the IRS. However, remember that the IRS says that these expenses must generally be accepted within the rental industry and should be ordinary in nature.
There are deductions for many things, such as interest on your mortgage, repairs to your home, and insurance plans.
Interest on Your Mortgage
Practically every homeowner will need to take out a mortgage to finance their property purchase. If you’re one of those landlords who possess a mortgage, one of the largest homeowner deductions you can take is the interest payments on your mortgage.
You can’t deduct anything that pays off the original loan amount, but any amount you pay to pay off the interest is fully deductible.
Your mortgage statement will have your interest-related payment every month. Just take one of these statements and find your monthly interest payment area. Then, multiply this figure by 12, and this is the amount you can deduct.
Furthermore, any origination fees, credit card interest, and refinancing your rental property are just some of the other things that can be deducted. These are more complex to deduct, though, and may require the services of a professional accountant.
Deducting Property Taxes
Nearly every state and municipality in the country has some sort of property tax. Depending on where you are, this could be a few hundred dollars a year or a few thousand dollars a year. A quick look online will help you figure out how much you’ll be expected to pay this year. You can also find this out from a tax professional.
If you also happen to live in a state that charges for a license to become a landlord, this is also deductible.
You also need to be aware of states that charge for short-term rentals. These are known as occupancy taxes and strongly resemble state sales taxes.
Also, remember that if you pay sales tax on purchases for your business, Social Security taxes for any employees, or employee salaries, you can also deduct expenses like this on your taxes.
Are You Paying Premiums on Your Insurance Plan?
Some lenders may require that you take out insurance before they’ll authorize the mortgage application. Insurance is a fully tax-deductible expense. This applies to home insurance and other forms of liability and disaster insurance.
If you employ others, you can deduct the cost of their health insurance and their workers’ compensation insurance as well.
Insurance premiums are typically higher for landlords who own rental properties, but the fact that you can deduct those premiums eases the burden somewhat.
You have the additional protection of deducting the cost of damages in the event of theft, floods, earthquakes, and hurricanes.
Tax Deductions for Depreciation
Your property and the contents of that property are naturally going to depreciate over time. In tax terms, this is known as depreciation, which is tax-deductible.
Depreciation can be claimed as a tax-deductible expense from the moment you purchase the property. So you don’t need to have any tenants yet.
You can take this deduction by calculating the expected lifespan of the property. The deduction can then be taken over multiple years.
According to the IRS, take note that land can’t depreciate, so you can only include the property on the land.
You can also add in the value of any equipment you use to manage your rental property. Such equipment may include your work computer and the car you use to move between your properties.
Any improvements to add value or extend the lifespan of your property may also be included. These improvements could include a new roof, new furniture, or purchasing energy-efficient appliances.
The improvement must last for more than a year, offer value to your rental business, and be expected to lose value in time, according to IRS Publication 946.
This is a complex process, so don’t be afraid to call in the help of a professional.
Deducting Maintenance and Repair Costs
Any home improvements you make can be deducted in the form of depreciation. Maintenance and repair costs, though, are also fully deductible. You can add this in separately to further increase the size of your tax deduction.
These costs are only eligible if they keep your property in good condition. They can’t add significant value to your property.
Acceptable expenses would include things like calling in an exterminator, landscape gardening, painting the walls, or fixing a leaky pipe.
If you decide to hire an independent contractor to manage these problems, the labor costs can be deducted. This also applies to any managers you hire to care for your rental property.
If you decide to handle these problems yourself, you can make deductions for equipment and tools.
Under the same rules, you can deduct fees paid to a homeowner’s association or any condo fees.
Can Utilities Be Deducted?
Different landlords will handle the utilities differently. For example, some charge utilities directly to their tenants, while others cover the utilities themselves.
If you’re the type of landlord who covers the utility bills, these payments are tax-deductible.
Smart landlords will pay the utilities and then take the utility fees from their tenants. This is legal, and the deduction can still be claimed without any problems. You will still need to declare the payment from the tenant as income, though.
Professional Fees are Also Tax-Deductible
Landlords have the chance to take specific professional fees as deductions. These can apply to everything from hiring a tax accountant to the cost of the software used to prepare your taxes.
Lawyer fees are fully tax-deductible, as are real estate agent fees. In addition, any advertising fees are fully deductible.
Even landlords who hire advisors can write off the fees paid to those advisors.
In short, any professional fees are classified as operational expenses.
There are some exceptions, though. For example, legal fees used during title disputes and costs to recover properties are not tax-deductible.
Is Travel Tax Deductible?
Professional landlords often have multiple properties. The good news is that you can deduct your travel expenses. This includes travel necessary to show your property to potential tenants and to collect income.
Your regular commutes, on the other hand, are not tax-deductible.
There are two ways in which you can take deductions for travel expenses. You can use the actual expenses or use the standard mileage rate. The standard mileage rate can be found here.
Office Space is Also Deductible
Do you have a dedicated workspace for your business?
Whether it’s a commercial property or a room in your home that you use exclusively for business, you can deduct the associated costs.
The rental costs and the square footage will be your most significant expenses. But anything can be deducted if it’s necessary for running your business, including expenses as small as the cost of printer ink.
Take note. You must maintain accurate records of your purchases. In addition, the home office space deduction is sometimes flagged for auditing, so ensure that you keep as much paperwork as possible.
How Can You Claim Your Tax Deductions?
Online tax filing will help you claim all rental property tax deductions you are eligible for. If you keep accurate records throughout the year, this will be a much easier process than you might think.
The tax deduction process would become more complicated if you used the same rental property as a primary residence at any time during the last tax year. The online software will tell you how many days you can use the home as a residence per year. If you exceed this limit, your tax situation changes.