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Rental Property

8 Tax Benefits of Owning Rental Property

Purchasing a second home to rent out is a great investment packed with perks. Learn about the tax benefits of owning rental property.

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If you currently own rental property or are considering it, you may find that this type of investment could bring you a lot of rewards. Rental property is a great source of passive income. You should be able to use this appreciating asset as leverage in future investments. Rental property can create a positive cash flow, and the rent payments you receive can go toward paying the mortgage payment.

One thing you may not have considered are the tax benefits of owning rental property. If done right, this investment could potentially be the biggest perk of all! Without further ado, let’s explore the top eight tax benefits of owning rental property.

1. Deduct Operating Expenses

There is more involved in managing your rental properties than you may imagine. But most operating expenses that you incur are able to be deducted – saving you money. The IRS provides examples of what types of operating expenses you may deduct. This includes:

  • Mortgage interest
  • Property tax
  • Repairs
  • Maintenance (including lawn, pest control, etc.)
  • Advertising costs
  • Insurance (paid by you, not the tenant)
  • Utilities
  • Property management fees
  • Any materials or supplies you need for your operation
  • Office space
  • Business equipment
  • And more

2. Deduct Mortgage Interest

This won’t help a cash buyer, but if you have taken out a mortgage to purchase your rental property, the interest you pay on that loan is entirely tax-deductible. That is, of course, as long as your loan value stays below $1 million. For those landlords who refinance for a higher loan to add improvements or maintain the property, that mortgage interest can be deducted as well.

3. Pass-Through Tax Deduction

As part of the Tax Cuts and Jobs Act in 2018, landlords qualify for a pass-through tax deduction that is actually an income tax deduction – not a rental deduction. There are two choices:

  1. Deduct up to 20% of their net rental income.
  2. Deduct 2.5% of the initial cost of the rental property and 25% of what was paid to employees.

It is important to note that the pass-through tax deduction is only valid until 2025.

4. Deduct Travel Expenses

Some landlords do a lot of driving to handle their rental properties. This can include rent collection, maintenance and repair, inspection, etc. Anything you need to handle regarding your rental property that doesn’t include an improvement can be deducted as part of your travel expenses. Though, when it comes to overnight travel,  you may catch the eye of the IRS – and may need to provide more info so take caution.

As you drive to your office, your rental properties, your bank, the local hardware store, and others, be sure to keep track of your travel expenses. You can deduct both your actual expenses (such as gas, the maintenance on the vehicle, etc.) and the standard mileage rate as stated by the IRS. Keep in mind that this only applies to those who drive a car, SUV, van, pickup truck, or panel truck.

5. Deduct Professional Services

As a landlord, you likely work with some professionals to keep your rental property investments in tip-top shape. This includes services from those in real estate, your attorney, accountant, financial advisor. It can also include your property management company. You can take this deduction for professional services as long as you are deducting work that took place concerning your rental property.

6. Depreciation Deduction

The depreciation expense that the IRS will let you deduct relates to your rental property. The IRS allows you to depreciate the property over 27.5 years (39 years for commercial property) as a means of recovering the cost of wear and tear. Note that this only refers to the home, not the land.

Any costs added that increase the value, such as a new roof, new windows, or new electrical wiring, may be included in this depreciation calculation. Depreciation can be tricky and it may be best to let your accountant handle the details for you. And, remember – you can deduct the expense of your accountant, too!

7. Ditch the FICA Tax

There is no need to deduct the FICA (payroll) tax, which includes social security and medicare taxes. Typically this would have to be paid by all taxpayers earning income – even those who are self-employed. However, when it comes to rental properties, the money received is not calculated as earned income. And, that means you don’t have to worry about the FICA tax.

8. The Capital Gains Perk

If you decide to sell your rental property for a profit, you may be able to take advantage of capital gains – either short term or long term. Because each impacts you in a different way, let’s take a look. Short-term capital gains occur when you sell a property that you have owned for less than a year. This money that you make on the sale becomes a gain – and it gets counted as income.

So, whatever you make profit-wise, just know that it could bump up your tax bracket when you go to do your taxes – and that’s not always a good thing. However, as a landlord, you can rent out the property and then sell it at least a year past the date of purchase. This will allow you to hang on to more money. The tax rate is much, much lower for long-term gains.

Depending on how much you make in your day job, you may not even owe anything at all! It is always good to talk to a financial advisor before making a move to switch up your portfolio – just to be sure you are doing the smartest thing for your taxes. Well, there you have it – 8 awesome tax benefits of owning rental property.

As you discover just how rewarding it can be (especially when you have a property management team like RPM Evolve), don’t dive straight into owning rental property without having a strategy. Network with experienced professionals and discover the path that will work best for you. That’s the one where you will find the most benefit.

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