Owning real estate is a great way to invest your money and grow your personal wealth. Being a landlord can greatly increase your wealth, but it is also a lot of time and effort. In addition to your own finances and responsibilities, you must find tenants, obtain insurance, and pay a mortgage as well as property taxes. Luckily, there are tax deductions that you can take advantage of to help increase more of what’s yours. This article will discuss some of these tax deductions in detail.
- Mortgage Interest
Mortgage interest for rental properties is a dollar-for-dollar deduction against rental income. Most mortgage interest amounts will be reported to the IRS each year on behalf of the taxpayer by the financial institution via IRS Form 1098. Any loan interest paid that is NOT part of a conventional loan (i.e., hard money interest, brokerage account interest, asset leveraged interest, etc.) may not report on Form 1098 so it is important for the taxpayer to track interest payments personally in case of an IRS audit.
In addition to mortgage interest, you can deduct origination fees and points paid when purchasing or refinancing your rental property. In addition to interest on unsecured loans used for improvements, and credit card interest paid on purchases related to your rental property. To qualify, you must have already spent money on these purchases at the time of filing your taxes. Since it’s difficult to determine what counts or understand how the extraneous interest charges are filed, it is best to seek the advice of a tax or financial advisor.
- Property Taxes
You can also deduct property taxes from rental income. Property tax is the amount you pay to your state and local governments each year on real estate that you own personally or as an investment. They can range from a few hundred dollars to hundreds of thousands of dollars, depending on many factors, from the location of the rental property to its size. This property tax deduction is a dollar for dollar write off against rental income collected. Property tax paid on a primary residence may be limited based on current and/or future Internal Revenue Code. You can also deduct any associated landlord or vacation rental license fees if your state has rental licensing requirements.
- Depreciation of Rental Property
Similar to business assets like office furniture or equipment that depreciate, a rental property is no different. Wear and tear, as well as obsolescence, reduce the value of your rental property and its contents over time. Owning rental property means you are also able to deduct the depreciation each year on your tax return. Even if you don’t have any tenants yet, you can claim depreciation as soon as your home or apartment is available for rent.
The deduction can be taken for the property’s expected life, but it must be spread out over several years (the IRS says rental properties can depreciate over 27.5 years). Keep in mind, that only the structure’s value can depreciate, not the land’s value. We recommend consulting your tax advisor as to how depreciation is taken as a write off since the calculations aren’t always that simple.
- Section 179 Deductions
Another way to reduce taxable rental income is through Section 179 deductions. If you qualify for this election, you can deduct up to $250,000 for qualified equipment purchases at the beginning of each tax year (for example, if you buy new rental property appliances). The Section 179 expensing method is designed to encourage small business owners to expand their operations by purchasing new equipment. This allows businesses to reduce their current-year tax liability, instead of capitalizing an asset and depreciating it over time in future tax years.
- Insurance Premiums
Rental insurance premiums are tax deductible against rental income. If you pay for rental property insurance, you can deduct this payment as a business expense on Schedule E of your tax return. Insurance of any kind is considered an ordinary and necessary rental property expense and thus deductible. This includes rental property fire, theft, and flood insurance, as well as landlord liability insurance. You can also deduct the cost of your employees’ health and workers’ compensation insurance if you have any.
- Maintenance & Repair Costs
Properties require regular upkeep, repairs, and maintenance to ensure they are in good condition. Examples of deductible repairs include repainting, fixing gutters or floors, fixing leaks, plastering, and replacing broken windows or appliances. The costs of these activities and the materials used can be considered deductible rental expenses. Be sure to record all costs involved as well as repairs done to maintain your rental property. Some large improvement costs may be dollar for dollar deductions and others may be depreciated over the life span of the asset. Please consult with your tax advisor as to what is fully deductible vs. depreciable.
How utilities are handled really depends on the landlord. Gas, electricity, water, heating, and air conditioning are all tax deductible if you choose to cover them for your tenant. You can deduct utility bills from your rental income as business expenses on Schedule E of your tax return. You can also deduct the cost of internet, cable, or satellite as a utility expense. You can continue to claim the rental property deduction and the reimbursement as income even if your tenant agrees to reimburse you for utilities later. Be sure to deduct only rental costs since personal utility expenses are not deductible.
- Legal & Professional Fees
Legal and professional fees necessary for your business is tax-deductible. Fees paid to attorneys, tax advisors, property management companies, real estate investment advisors, and other professionals are tax deductible. If the fees are paid for work related to your rental activity, you can deduct them as operating expenses. However, you cannot deduct legal fees paid to defend your property’s title or to recover and improve it.
- Travel & Transportation
You can classify business-related travel costs as business expenses on Schedule E of your tax return. This includes paying to have your rental property shown to potential buyers, collecting rental income, and maintaining it throughout the year. Any reasonable commutes made on a regular basis, however, are exempt from this policy. You have two options for deducting travel expenses: actual expenses or the standard mileage rate. The standard business mileage rate for 2021 was 56 cents per mile (down 1.5 cents from the rate for 2020).
Why work with Robert Hall & Associates?
With over 50 years of experience, Robert Hall & Associates has been helping real estate developers and investors implement the best tax structuring strategies, in order to enhance the values of their real estate holdings. If you are looking for a tax advisor who specializes in real estate, we invite you to see the Robert Hall & Associates difference for yourself.
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