Understanding Tax Deductions for Rental Property - RPM Evolve Real Property Management Evolve

Understanding Tax Deductions for Rental Property

Diversifying your portfolio comes with many advantages, one of them being tax deductions for rental property. Here’s what to know

Investment strategies will vary from one person to the next based on personalized goals. Most active and seasoned investors are always looking for ways in which they can see a greater return on their investments. There are many ways this can happen.

For those investors who have a percentage of their portfolio containing rental property investments, there are additional benefits than those found on the surface – and they come in the form of tax deductions for rental property. A CPA will have all the details you need in regards to your specific properties so it is highly recommended you find someone in your area.

In the meantime, we’ve put together a list of the most exciting tax deductions for owners of rental property.

Property Taxes

Property taxes are due every year on all property you own, whether you live there or have it as an investment property. Many local and state governments use this money to invest back in the community, such as maintaining roadways, schools, special projects, and more. And the amount you pay is based on where the property is located and its current value. It is necessary to pay the property taxes for each property or you could find yourself dealing with tax liens against the property – and that could lead to even bigger hassles.

There have been changes to the IRS deductions so, to make sure this deduction is not forgotten and to make sure it is done right, it is important that you work closely with a CPA. Don’t miss out on this benefit.

Mortgage Interest

If you have a rental property that you didn’t purchase with cash and instead have a mortgage payment, then technically, the interest you pay on that mortgage is deductible. The reason? It is a business expense.

At the beginning of each year (usually within the first month or two), you should receive a 1098 Form from your lender. This will show you the interest you paid throughout the year. Be sure to keep this form and give it to your accountant. As your tax return is prepared, this deduction can often be added to the IRS Schedule E (for residential rental property owners) and the mortgage interest you paid for the year can be deducted.

Your CPA will be able to go over all of this with you to make sure you are getting the most out of your rental properties.

Repairs

Repairs can come often – and they can be very costly. This is multiplied if you have more than one property. So, it is likely music to your ears to hear that repairs can be deducted when preparing your taxes. The thing is, however, that you are going to need to work with an accountant to see what will and will not count. For the sake of this article, let’s look at a few of the common repair tax deductions for rental property.

Repairs for things such as can be deducted:

  • Repairing a broken stove burner
  • Painting the walls
  • Fixing a leaky toilet
  • Changing locks

Now, there are some repairs you may make on your rental property that cannot be deducted, but rather are made to be capitalized. Certain things that add value to the house become, well, part of the house. A few examples of these items include storm windows, flooring, AC unit, additions, water heaters, roofing, etc.

Let’s say you purchase a home for $250,000.00 and immediately add a new roof for $15,000 and new windows for $7,000.00. The IRS will not allow you to write off the roof and window expenses, but it now looks at it as if you purchased a rental property for $272,000.00.

These bigger, value-changing repairs get capitalized. And, while it may not excite you too much at the moment, it does often mean you could have a greater depreciation amount to deduct.

As we said, things get tricky in this area and you don’t want to misclassify anything, then keep receipts for your records and then let your CPA put your repairs in the right classification.

Depreciation

Rental properties are investments. And, for the most part, their value tends to increase over time. But, as a business owner, your equipment, machinery, building, and so forth will depreciate over time – and you are able to deduct this from your taxes. Can you view your rental property as a depreciating asset of your business? Maybe.

Talk to your CPA and see if this is something you can do. And if so, leave it to the professionals to take care of. Calculating depreciation normally can be mind-boggling if you aren’t an accountant  – and calculating depreciation of rental property is different.

Misc. Expenses

Finally, there are some miscellaneous expenses that you may be able to take deductions on. Knowing what applies to you and what doesn’t is something you can learn from your CPA. But, as a general rule, we’ve listed a few expenses to consider for tax deductions for rental property.

  • Utilities, such as water, gas, electric
  • Advertising and marketing of the rental property
  • Any insurance premiums
  • Transportation costs regarding rent collections, maintenance, and repairs

There are a lot of possible situations when it comes to these expenses. For instance, you can deduct transportation costs, but not if you are driving from your home to the rental property as this is considered a commute. Though, if your home is considered your place of business, you may be able to deduct it.

Final Thoughts

Without a CPA on your side, it would be hard to know which way is up with the IRS – and your financial documents are the last thing you want to mess up.

Having a property manager like Real Property Management Evolve handle your rental properties makes it easy for you to track expenses and have your reports organized and ready to go to your accountant when needed. Don’t miss out!