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Tax Deductions For Rental Property Owners

5 minute read

By Ryan Pratt

Being a landlord can bring in a significant revenue stream, but it isn’t as easy as it looks. There are a lot of investments involved, including insurance, property taxes, and additional mortgages. On top of that, renting out real estate can make tax season tricky.

If you own a rental property, or are considering getting into the business, here are some tax deductions that you should definitely check out.

Mortgage Interest

Of all the expenses you can claim as a landlord, deducting the interest on your mortgage loan is likely the biggest. While you aren’t able to deduct the portion of your payment that goes toward the principal loan amount, you can deduct from payments aimed at interest charges.

These totals are easy to spot on your monthly statements and simple to calculate. You can determine your total annual interest by multiplying the monthly amount by 12.

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Maintenance Repairs

Part of the landlord hustle is maintaining your rental property and responding promptly to repairs. Needless to say, the costs can really climb if you outsource these maintenance needs to various professionals.

Luckily, you can deduct these expenses – including labor – as long as the repairs are geared at restoring the original condition of the rental. In other words, don’t claim repair costs that seek to improve the market value of the property.

You’re already enjoying significant savings if you possess the skills to fix property issues yourself. While you cannot deduct your own labor, you can claim any rental fees from borrowing necessary tools or equipment.

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Property Taxes

Laws and rates on property taxes vary by state, so you should speak with a tax professional about deductions that are available in your area. However, if your property is subject to any rental licensing requirements, occupancy tax, or even sales tax, you can deduct all of those fees.

The IRS limits the deduction of state and local income, including sales and property taxes, to $10,000 (or $5,000 for a married couple filing separately). The good news is, that particular limit doesn’t apply to business-related ventures. So, you may be able to claim the full amount as a business expense if you’re slaying the rental property game.

Renting Out Your HouseShutterstock

Utilities

Landlords and tenants come up with all kinds of arrangements when it comes to paying utilities. Some of these arrangements can be claimed on your tax return, provided your tenants aren’t paying their own utility bills each month.

A tenant’s gas, water, electricity, heating, and air conditioning – not to mention their cable and internet – will be tax-deductible if you choose to pay it. Sometimes an agreement is made that the tenant will reimburse the landlord for utility costs at a later juncture. In those cases, you can still deduct the utilities and then claim the reimbursement as part of your income.

Couple Discussing Rental Scam with Business ProfessionalShutterstock

Insurance And Depreciation

There are a variety of incentives aimed at insurance and depreciation. Virtually any kind of insurance fee you pay on your rental property can be deducted, including premiums related to theft, fire, flood, and landlord liability insurance.

You can also claim a portion of your rental property’s cost to address depreciation. This claim is generally spread out over a number of years, and assessed based on the expected lifespan of the structure. Even though the IRS states that rental properties can depreciate over 27.5 years, you can technically claim depreciation before your first tenants move in!

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Professional Fees

In the same way you can deduct your repair bills, you can claim a variety of fees for outsourced guidance. If you ask a lawyer to look over some paperwork, you can deduct those hourly charges. If you work with a real estate agent to find tenants, you can claim their commission.

Just about any professional fees that help you operate your rental business are fair game. This means you can also deduct any expenses gathered from appointments with financial advisors, advertisers, and real estate personnel.

Shutterstock: Production Perig

Office Space

You can deduct the square footage of your office, as long as the workspace is exclusively organized to run your rental property business. It doesn’t matter if you operate out of a commercial property or a corner of your home, nor does it matter if you own or rent that space.

Any technology or equipment that helps you thrive as a landlord can likewise be subtracted from your income taxes – including the computer software that helps you file it! Keep all receipts related to stationery, electronics, and furniture that you buy for this space.

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What Kind Of Landlord Are You?

Your involvement level will dictate your eligibility for many of these deductions. The IRS ranks landlords on a tax spectrum, with “passive activity” on one end and “real estate professional” on the other.

In the middle of these poles lies “active participation”, which can help landlords reduce their passive losses, and “material participation”, which warrants non-passive tax treatment. The degree of effort you put into your rental property determines your classification, affecting how your income and losses are treated.

Shutterstock: Bonita R. Cheshier

Income And Losses

By and large, real estate is a passive economy. However, to qualify as a real estate professional you must prove the following:

  • You spend more than half of your working hours invested in your rental business.
  • You log over 750 hours per year working on your real estate rental property.

Any activities related to construction and acquisition, as well as property management and development, count toward the above criteria. If you qualify as a real estate professional, the IRS sees your revenue as “active income”. This designation entitles you to use losses to counterbalance other income and avoid a 3.8% net investment tax.

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Record Every Expense

No matter where you fall on the IRS classification chart, keeping detailed logs on how you spend your time and resources will reward you with better tax treatment. Appointment books, calendars, and receipts can go a long way in proving your active participation.

These tax deductions are designed to help rental property owners build their business. Speak to your tax professional and make sure you’re trimming every allowable expense!

Shutterstock: sophiecat

Key Takeaways

  • Rental property owners can score big on tax deductions, depending on their level of involvement.
  • Qualified landlords claim a lot of expenses that contribute to their business, including utilities, office space, and outsourcing fees.

Ryan Pratt

Contributor

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