Tax Deductions for Rental Properties

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Tax Deductions for Rental Properties

Depreciation

This is one of the biggest ways to save on your taxes. Depreciation allows owners to deduct a portion of the cost of their property over several years. The actual cost of the rental property is not able to be fully deducted in the same year you pay for it.

By the IRS’s standards, if you depreciate the entire building with its contents, it must take 27 ½ years for a residential property, or 39 years for a commercial property. Each year, you can have an income of up to your depreciation value without having to pay any income taxes on it. There are strategies that speed this process up such as segregation, dividing up appliances and furniture which depreciate in about five years.

Improvements and repairs

Making improvements and repairs to a rental property is inevitable. However, the full cost of any

repair can be deducted from your taxes in the same year that they occurred. Examples of these repairs include damaged flooring, windows, leaks, repainting and plastering. Property improvements are counted in the cost basis, and most are also able to be depreciated over time.

To determine whether a project on your property is an improvement or a repair, ask yourself if it adds any value to the property. If the answer is yes, then it is an improvement, but if not, then it is a repair and is simply preserving satisfactory condition.

If you are making your building more energy efficient, this also has a tax deduction. The deduction can be as high as $1.80 for each square foot if the property reaches the 50 percent energy savings target.

Operating expenses

There are costs to keeping your property up and running that you should not overlook when considering your tax deductions. Financing a rental property, interest on loans or credit cards, local property taxes and other fees, advertising and utilities also qualify as deductions.

Costs for services associated with your rental property also qualify, including landscaping and garbage pickup.

Travel

Any driving required because of a rental property including meeting tenants and making repairs is deductible as a travel expense. Landlords can either deduct their actual expenses (including gasoline and maintenance) or they can choose to use the standard mileage rate (55.5 cents/mile). Costs of parking and tolls are also deductible.

If your rental properties require long distance travel, these costs too can be deducted. Your airfare, hotels, meals and other expenses can be deducted. If you are traveling overnight, make sure you accurately document all of your expenses because these trips are closely watched by the IRS.

Home office

Whether your office is in your home, a rented space, or part of a property you rent, certain expenses can be deducted. If you have a home office, you can deduct homeowner’s insurance, interest on your home mortgage and a portion of your utilities.

Qualifications must be met: the space must be where you conduct the majority of your business, and exclusively used for this purpose. If you are concerned about an audit for this deduction, you can maintain a log of your time spent in your office, or keep pictures or diagrams of the office online or in your files. Utility bills and supply costs are included in the deduction.

Employees and independent contractors

Any time you hire someone to do a service for your property; you are able to deduct their wages from your taxes. Whether this person is a full time employee, such as a manager, or independent contract labor, such as a repair man, any hired individual qualifies.

Losses

If you experience an unexpected event like a flood or a fire, you can obtain a deduction for either all or part of your losses. The amount you are able to deduct will depend on how much of your belongings were covered with insurance and how much was damaged.

Insurance

Almost any premium for insurance that you have for your rental property can be deducted. Insurances that are included are: fire, theft, flood, employee health, workers’ compensation and landlord liability.

Legal and professional services

Any fees you may have to pay to attorneys, companies that manage your properties, real estate advisors, accountants and other professionals are included in your tax deduction. They may qualify as fees necessary for operation as long as they relate to your rental business.

Now comes the disclaimer – The information above is my personal opinion. I am not a tax accountant or attorney. Please consult a professional licensed tax advisor and attorney before you decide to take on the IRS.

Hope this information helps you at least know what questions to ask and things to think about in making a decision on investment property. I look forward to assisting you!

 

Susan

Susan Hilton

CENTURY 21 Beal, Inc.

979-764-2100

 

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