If you want a steady income every month, rental property is the way to go. But with rental property comes numerous expenses. From management companies to replacing the siding, you can put a lot of money into a rental property.
But many of these expenses are tax-deductible. Knowing which ones you can deduct is important to receive the maximum benefit of owning rental property.
Deduct State and Local Property Taxes
Most property owners must pay property taxes, which, depending on your location, can add up to thousands of dollars. These state and local taxes are deductible.The Internal Revenue Service (IRS) limits these deductions to a combined limit of $10,000. So, you cannot deduct any taxes over this limit.
Some states or localities charge a fee for short-term rentals. This is known as an occupancy tax and is similar to a sales tax. The good news is that it’s deductible.
Also, sales taxes on business-related items and any wage or Social Security taxes for employees can be deducted.
Mortgage Interest Deduction
You can deduct the mortgage interest. But you cannot deduct the payment portions that go toward the loan’s principal. The deduction only applies to interest charges.Interest charges will be listed on your lender’s monthly statement. Multiply the monthly amount by 12 to calculate your annual total interest.
Property Depreciation
Wear and tear on a rental is always present, and this is known as depreciation. You can claim depreciation once your building is available for rent; it doesn’t need to have tenants in it yet.
Although the deduction can be taken for the property’s expected life, it must be spread out over multiple years. For example, for every full year a property is in service, it would depreciate an equal amount of 3.636 percent.
If the property has been in service for less than one year, it will depreciate a smaller percentage for that year, depending on when it was put in service. For example, a property put in service in May would depreciate at 2.273 percent, while one put in service in December would depreciate at 0.152 percent.
The structure depreciates, but the land doesn’t; it remains the same.
Repairs vs. Improvements
Even though repairs and improvements might appear similar, there’s a significant difference when it comes to taxes.Repairs maintain the property’s condition while improvements add value or extend the useful life of the property.
For example, a task that restores the property to its original value is a repair, such as:
- fixing a faucet
- patching a hole in the roof
- repairing an air conditioner
- maintaining appliances
- adding a room
- replacing the roof
- installing a new HVAC
- installing new windows
A repair is an expense that can be deducted in the year it occurred. It directly reduces your taxable income. In contrast, an improvement must be depreciated over time. And therefore, the tax deduction is spread out over time. For a residential property, that period is typically 27.5 years. This provides tax savings over an extended period.
Paid Utilities Can Be Deducted
You can take a tax deduction if you cover all utilities instead of your tenant. This includes paying for internet, cable, or satellite. They are considered utilities. If the tenant reimburses you later for the utilities, you can still deduct the utilities. You will claim the repayment as income.Insurance Premiums Deductible
Lenders require insurance. Even if you own the rental property outright, you should have a property and liability insurance policy.Insurance is considered a necessary expense and is deductible. This expense is also deductible if you provide health insurance to any employees.
If insurance doesn’t cover a loss like hurricanes, floods, earthquakes or theft you can deduct your loss. Or if insurance doesn’t cover the entire loss, you can deduct what the insurance didn’t pay. But you cannot deduct the amount of loss that the insurance paid.
Deduct Travel Expenses
You can deduct your transportation expenses if your rental is far from your residence or you have multiple rentals. That means the expense is deductible if you need to show your rental property, collect rent, or conserve the property throughout the year.You can deduct the actual expense or deduct the standard mileage rate. In 2024, the mileage rate is 67 cents per mile. Remember to keep records regardless of which method you use.
Professional Services Deduction
If you employ a property management company, that expense is deductible. You can also deduct attorney fees, accountants, investment advisors and any other professionals you use. These deductions must be related to the rental property activity.Personal Property and Office
Many rental property owners own personal property on their rental property. Appliances are considered personal property. Personal property like computers or gardening equipment may also be used for your rental business.The cost of this personal property can be deducted in one year up to $2,000.
Rental property owners may be able to deduct their home office expenses from their taxable income. Not only does this deduction apply to an office, but it also applies to a workshop or any other workspace in your home used for your rental business.
Use Rental Property Deductions
Know the tax rules before investing in rental property. There are several deductions that can maximize your investment’s bottom line. Keep good records so you are prepared for tax season and talk to an accountant to ensure you take all the deductions due to you.The Epoch Times copyright © 2024. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.
