All income from rental properties must be reported as part of your gross income on your tax returns. This includes any monies received for either the use of or occupancy of your rental property. In addition, any of your rental property expenses paid by a tenant must also be included as rental income. Read on to learn more about the rental property tax deductions available to you as a rental property owner including loan interest, property tax, other taxes, insurance premiums, depreciation, improvements and repairs, and office space costs.
Deducting the interest on the mortgage for your rental property as a business can result in a major tax deduction.
This should be documented by your mortgage lender on form 1098 which indicates the amount of interest paid on your mortgage for the year.
Usually, this is reported to the IRS on IRS Schedule E which is used by property owners of residential rental property.
In addition, any origination fees or points paid for the purchase of your rental property can also act as rental property tax deductions.
Also, any interest paid on loans that are unsecured for property improvements or any interest paid on credit card purchases having to do with your rental property can also be deducted.
Property tax on your rental property can also be deducted on your taxes.
If you use your rental property for short term rentals and pay occupancy taxes, these can also be deducted.
Other taxes that are deductible include sales tax for items related to your rental property and wage and social security taxes for any employees who are related to the rental property.
Any premiums paid for insurance on rental properties are deductible.
This includes insurance premiums paid for homeowner’s insurance and for any additional liability insurance.
Insurance premiums paid for worker’s compensation insurance and worker’s health insurance can also be deducted.
In addition, losses due to floods, earthquakes, hurricanes, and theft are tax-deductible.
Depreciation refers to the decrease in value of your rental property due to wear and tear and deterioration over time over the useful life of the property and is tax-deductible.
According to the IRS, the useful life of a rental property is considered to be 27.5 years.
If your property is used only for personal use you cannot claim depreciation of the property.
Depreciation of other items related to your rental property such as furniture, machinery, computers, equipment, and vehicles can also be deducted.
Certain improvements (which are stipulated by the tax code) to your rental property can also be used as deductions under the depreciation category if they will last more than one year and will add to the value of your business and will lose value as time progresses.
Maintenance and Repairs
Certain types of repairs and maintenance are deductible which does not add a significant amount of market value to your rental property.
This includes things like the painting of the rental property, paying for landscaping services, pressure washing of the building’s exterior, and the costs of pest control.
Also deductible is costs for repairs for broken appliances and repairs to pipes and walls.
In addition, the costs of hiring outside contractors (including supplies) or paying homeowner associations to do the required work can also be deducted.
Condominium and Homeowner association fees which cover routine maintenance and upkeep of your rental property are also deductible.
Capital improvements (capital improvements involve adding permanent structures to your rental property that will either increase the value of the rental property or increase its useful life) to your rental property which should not be deducted as repairs and would have to be capitalized include things such as:
- Additions to the rental property
- Major landscaping changes and sprinkler systems
- New storm windows
- A new roof
- A new security system
- A new heating and air conditioning system
- A new water heater
- New floors
- New insulation installation
If you are paying for your tenant’s utilities such as electric, gas, water, or internet services these are all tax-deductible.
Legal and Professional Fees
Legal and professional fees are tax-deductible. These include:
- Professional accounting services of a CPA, tax preparer, or tax preparation software
- Legal fees to review or prepare lease agreements or contracts and to prepare eviction filing paperwork
- Real estate agent commission fees for referring tenants and tenant screening
- Property management costs which can average between 8% and 13% of the amount of the collected rent
- Advertising expenses such as producing signs for yards or advertising in local newspapers
Travel and Transportation
Transportation expenses for travel to or between rental properties are considered tax-deductible.
This includes travel to show properties, travel to collect rental payments, and travel to supervise improvements to the rental property.
Deductions can be either for the actual cost of the travel involved or by deducting the mileage rate for business travel of 57.5 cents per mile.
In addition, fifty percent of the cost of meals purchased while traveling can also be deducted.
Office space costs for the operation of your rental property can also be deducted.
- Office rental cost
- Phone line costs
- Computer line costs
- Computer software costs
- Printer and ink costs
Documenting Rental Property Deductions
It is essential to keep accurate records of any and all rental property tax deductions.
Be sure to maintain a file with documentation of all receipts of payments, canceled checks, and invoices.
In addition, be sure to keep a record of all travel expenses with appropriate documentation.
The Internal Revenue Service allows for the deduction of the costs of common expenses that are necessary to operate a rental property. Proper knowledge of the extent of these deductions and the documentation necessary can result in maximal rental income profit. Avoiding misclassification of potential deductions can limit the possibility of an audit by the IRS. Consult your CPA or a tax professional who has considerable experience in the rental property tax field to maximize your available rental property tax deductions.