Here comes tax time, are you keeping track of the top deductions?
Creating passive income, building equity and gaining appreciation are all great reasons to own property. But it’s also important to know that there are huge tax benefits while owning a rental property. Unlike stocks and bonds there amazing tax breaks for rental property owners. It’s important to know what they are so you can keep track of them
Let me put a disclaimer out there, I am not a tax professional and different set of circumstances can be different outcome for each individual. Please consult with a CPA or accountant to understand how these tax ramifications may apply to you.
With that out of the way here are a dozen ta benefits for rental property owners
Repairs: Typically, repairs to your rental property are deductible in the year they are made. Check with your accountant on whether larger projects categorized as “improvements” should be depreciated rather than deducted (see #3 for more information). Any repair to your plumbing, heating, electrical, or carpentry may be a deduction, lowering your rental income.
Interest expense: While mortgage interest is typically the largest deduction available to landlords, it is not the only form of interest expense. For property-related expenses, you can subtract interest on home improvement loans and even credit card interest.
Depreciation: Because you don’t have to pay any money to get this deduction, it’s like getting a cash gift off your rental income tax bill. Per year, you can subtract a portion of the structure’s expense as depreciation (the value of the land is not depreciable). Here you can learn more about rental property depreciation and see examples.
Marketing: Any paid ad you run for renters is a deductible cost, whether you advertise it in local newspapers or magazines or pay to get it listed on a rental property website.
Travel expenses: Both local and long-distance travel expenses count against this exclusion if the primary reason for the trip was related to rental property operation. The following are examples of typical travel expenses:
-Attending a viewing with a potential tenant
-Driving around doing market research or looking at potential homes to buy
-Attending a landlord seminar or course for rental investing — talk to your accountant about which hotel, airfare, vehicle, or other expenses you can write off and how to prove them.
-Material sales at the hardware store
Insurance: You must insure your investment, and your lender would need it if it is mortgaged. Insurance premiums, including liability, casualty, and all other insurance related to the rental property, are deductible.
Local property taxes: While real estate taxes are imposed all over the country, you can subtract the district, city, and school taxes you pay on your rental property.
Theft and casualty losses: Break-ins or property damage caused by illegal behavior or even acts of nature are usually completely deductible. Of course, this only applies to costs not covered by insurance, such as deductibles charged on a lawsuit.
Legal, accounting, and management services: You can hire experts in all of these fields, and the fees you pay them are tax deductible in the year they are used. Uncle Sam will pay a portion of the cost of hiring a management firm to handle all of the headaches of rental property ownership and tenant relations by a deduction from the rental income tax.
Offset other investment income: In certain cases, losses from a rental property can be used to offset income from other investments. Why would you lose money? If your depreciation deduction is substantial, it can wipe out a lot of real income without you spending any extra money. You may be enjoying a great positive cash flow, but combining mortgage interest and depreciation you could show a paper loss. Again, check with your accountant to see if this deduction applies to you.
These rental income tax cuts can add up to significant tax savings and increase the profitability of your investment. Consult your tax advisor to see if you can benefit from these valuable deductions for rental property owners.
Any rental properties may have suffered losses as a result of the coronavirus pandemic’s economic impact. However, tax relief provisions included in legislation passed by Congress in 2020 could be of assistance. A high-level overview of this complex issue is here, but check with your tax professional to see whether the provisions apply to your situation.
Visit the Internal Revenue Service website for more statistics and publications on rental income and expenditures.