February 21, 2024

Rental Property Tax Deductions for Landlords

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Economic realities change every day but for owners of real estate, federal tax obligations are a constant. Luckily, while rental income must be reported, there are multiple ways to take advantage of tax deductions that can help you make savings and recoup from would-be losses. Since most of us are not tax experts, it is important to stay up to date with the basic considerations that apply to rental property tax deductions.

This article examines common rental property tax deductions, including tips on how you should go about filing and what you must never overlook.

Mortgage Interest

We all want to own homes and mortgages help us make these dreams a reality. However, when you’re seeking tax deductions, mortgage interest is a tax incentive that you can take advantage of. One aspect that makes mortgage interest deductible is when it is secured by the home, but not in other cases where personal loans are involved. In this case, it is said that the mortgage is a secured debt and the home could satisfy the payment of the debt.

Hence, to qualify for tax deductions, your home can be a primary or secondary residence and even a rental real property where you have a mortgage. An exception is when the owners live in the said property, in which case the interest deduction is limited to $750,000 mortgage debt. In the case where married individuals are filing separately, the debt limit is halved to $375,000 or less.

Other conditions you need to satisfy to deduct home mortgage include:

  • You file Form 1040 or 1040-SR. When doing this, you must itemize deductions on Schedule A (Form 1040).
  • The mortgage is secured debt by a home where you have an ownership interest. Essentially, you can only deduct the interest when the funds are used to purchase, construct, or improve your home.
  • You can fully deduct your mortgage interest if you satisfy a set of conditions. The conditions include the dates of the mortgage, amount, and usage of mortgage funds.

To know how much you should file as deductible interest, inquire with your mortgage company. They should send you an IRS form 1098 showing all the interests paid that year.

Property Taxes

Property tax deduction makes it possible for homeowners to write off state or local taxes paid on a property. A write-off is an accounting term that refers to the reductions to the values of an asset, and by declaring these items, they are debited to the liabilities accounts. According to the Tax Cuts and Jobs Act of 2017, the deductions for state and local taxes (SALT) were capped at $10,000. For married couples that file separately, the amount is $5,000.

But how do you know which property taxes are deductible? Some property taxes that can be deducted include your primary home, vacation home, land, boats, and vehicles. But not every property tax payment is deductible and these include:

  • Unpaid taxes
  • Payments made on rental or commercial property
  • Taxes paid when transferring sales of a house
  • Taxes paid for a property you don’t own directly
  • Costs incurred on home renovations or constructions for improvement
  • Utilities like water and trash collection

Experts usually advise those filing for property tax to choose between standard or itemized deductions when claiming reductions. While some people might choose to go for standard deductions, itemized deductions make it easier to list all your eligible expenses. So, before filing, pay attention to whichever amount lowers your tax bills the most to avoid as they differ from one individual to another.

Insurance Premiums

Insurance premiums, especially mortgage insurance premiums are some of the most overlooked deductions. Since getting the lowest tax liability should be a priority, you need to know which deductibles you can make on your insurance premiums. To understand the logic behind insurance premium deductions, we can look at medical expenses, where insurance premiums and deductibles are common.

One example of premiums often paid out-of-pocket is short-term health insurance premiums. When you take the itemized deduction on Schedule A (Form 1040) and calculate to find that medical expenses are greater than 7.5% of your annual income, you are eligible for deductions. These deductibles remain valid regardless of whether you paid for yourself, your spouse, or your dependents. Essentially, they’re in place to protect you from emergencies and the high costs of medical care.

Equally, where homeowner and mortgage insurance premiums are paid, the goals are almost similar. On one hand, homeowner’s insurance protects you from losses when the property is damaged. On the other hand, mortgage insurance offers protection when you’re unable to make mortgage payments. The major difference is that homeowner insurance policies apply best to individuals living in their own homes. If you’ve chosen to rent out the property, you’re better off with landlord insurance that protects against losses to the rental property.

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    Asset Depreciation

    We all know that assets like land and property appreciate over time. But did you know that owners are eligible for asset depreciation tax covering their property if it has been in the market for some time?

    Asset depreciation is a term that describes the present value of an asset while accounting for the total value of its usage. Depreciation is a rental property deduction because as time goes by, the value of real estate goes down, especially because associated costs like maintenance go up.

    To determine the rate of asset depreciation that can be deducted, the IRS uses straight-line depreciation, one of the many types of depreciation. When applied to real estate, straight-line depreciation covers residential rental real estate aged 27.5 years and above. For commercial rental real estate, those over 39 years are eligible.

    So, you might be wondering, how does the IRS calculate depreciation on real estate assets? The formula used to capture depreciation is simple, and it requires you to divide the value of the property against the useful life. In this scenario, useful life is about 27.5 years when it is a residential rental property and the amount from the equation is what can be deducted from the net income earned from the property as tax deductions.

    Repairs

    We’ve all had to do repairs and whether it was a broken window, door, or even a ceiling one time or another. But while the average homeowner cannot claim tax deductions for repair expenses, businesses and rental property owners can. These parties can claim tax deductions for expenses relating to repairs, replacements, or maintenance of the property.

    Another dimension of deductibles is the situation whereby the property owner offers the tenant credit to perform repairs. This credit can be in the form of deductions from their monthly rental payments or some other types of arrangements. While the credit can be viewed as income, the property owner can still file the credit offered to the client as a repair expense.

    However, an aspect that often creates confusion is the status of repairs which can be confused with improvements or remodels. Deductible repairs are those that are conducted to the larger asset and not those that replace the whole asset. For example, if a toilet pump is not working, that is considered deductible but when you remodel the entire bathroom, that is considered an improvement. In the latter case, upgrades or improvements are not deductible as repairs.

    Other relevant rental property deductions

    When it comes to tax deductions, knowledge is always power and because the law is always changing, landlords and homeowners always need to update themselves. Some tax deductions available for landlords include those that cover a range of services including:

    • Travel expenses. You’re often entitled to tax deductions for your expenses when traveling to your property. In this instance, a landlord is covered for traveling to the rental property to deal with a tenant, such as an issue a lease agreement or visiting hardware stores for repair materials. These expenses are tax deductible because they are usually necessary and reasonable for efficient service delivery.
    • Legal & professional services. When dealing with property and clientele, you often need to procure a range of legal and professional services. These professionals can include attorneys, accountants, property management companies, and even marketers. When these services are directly related to your rental activities, they are considered deductibles.

    Key Takeaways

    The list of deductible aspects in rental property reveals that indeed, rental property owners need to be aware of tax reductions available to them. There are numerous tax deductions for those that buy oir run rental properties depending on the local and federal guidelines involved. Yet, regardless of the tax deductions sought, one major consideration is that you should always pay attention to two major things: documentation and timing.

    • Good documentation protects property owners by ensuring they can tick all the right boxes when preparing financial statements and returns. Hence, maintaining accurate records is important because you will have to prove the rental income and expenses you need to be deducted. These documents are diverse but they generally include receipts, bills, checks, and other documentary evidence.
    • Finally, you should always file on time. Almost all tax deductions apply to expenses incurred within a year. So, in case you pay forward, for instance, pay bills two years in advance, deductions only apply to the current year filed. These guidelines ensure that real estate activity and tax returns match current legal frameworks.

    Always remember that if you’re in doubt, consult with experts first. Our team at Steadily is made up of industry experts who offer landlords great insurance service and a compelling experience from quote requests to claim resolution. With flexibility as a mobile-first and direct-to-consumer, Steadily is poised to rapidly remake the insurance segment and cater to all rental property owners’ needs. Reach out to us or visit our sites to learn more about your tax-deductible options.

    FAQs

    What Rental Property Expenses Can I Deduct on My Taxes?

    Landlords often wonder about the types of expenses they can deduct from their rental property income. This FAQ covers a wide range of deductible expenses, including mortgage interest, property taxes, maintenance costs, insurance premiums, and even advertising expenses.

    How Do I Calculate Depreciation for My Rental Property?

    Depreciation is a crucial aspect of rental property tax deductions, but it can be confusing to calculate. This FAQ breaks down the basics of depreciation, explaining how to determine the property's cost basis, useful life, and the methods to calculate depreciation expenses.

    Are Professional Services Deductible for Rental Properties?

    Many landlords seek to understand if expenses related to professional services, such as property management fees, legal consultations, and accounting services, are eligible for tax deductions. This FAQ provides insights into the deductibility of various professional services and how they can impact your overall tax liability.

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