Every week, Mansion Global poses a tax question to real estate tax attorneys. Here is this week’s question.
Q: I have a rental property in the U.S. What are some last-minute tax deductions I can take before Tax Day in April?
A: It depends on what kind of property it is, according to William Kambas, partner at Withers Bergman LLP, an international law firm with US offices in Connecticut, New York and California.
The rules for individuals vary greatly from real estate corporations, he said. But if a homeowner has a property he or she rents out for more than 14 days a year, there are a number of potential deductions.
“The expenses of doing business will be deductible,” he said. “Let’s say someone has a beautiful coastal or mountain property and wants to rent it out. They are going to want to advertise to the public. The may travel to maintain that home or show it. Anything that furthers the business can be deductible.”
Other deductions can include professional fees and insurance, utilities and common charges on the building, which are essentially fees for cleaning and maintenance, Mr. Kambas said. Mortgage interest and property taxes are also deductible, and, for 2017’s taxes, are not subject to the caps written into the tax bill that went into effect this year.
“For tax purposes alone, there’s also depreciation to consider,” Mr. Kambas said.
Depreciation “allows a taxpayer to recover the cost or other basis of certain property. It is an annual allowance for the wear and tear, deterioration, or obsolescence of the property,” according to the IRS. For most property placed in service—or initially put into use—in the 2017 tax year, the deduction is generally capped at $510,000 per year.
The deduction is for properties used in a business or for investment purposes. This is, generally speaking, income-producing properties and should include vacation homes that are managed as such. It doesn’t cover land alone, but buildings and furniture qualify, according to the IRS. Upgrades to the property should also be depreciable, so part of the cost of any repairs could also be deductible.
The new tax bill has caused some confusion about depreciation, according to Mark Stone, a partner at New York City-based firm Holland & Knight. For residential buildings, there is “a 27.5-year depreciation period unless you elect the new full 163(j) interest allowance for real estate, in which case it is a 30-year life,” he said.
Both lawyers emphasised the need for thorough record keeping, including leases. Mr. Kambas noted that rental income is “scrutinized by the IRS.”