Owning a rental property can be extremely lucrative, but it also comes with many costs. On top of paying for the home itself, whether you own it already or are paying off a mortgage, you will have to pay for the maintenance and operation of the property.
When it comes time to do your taxes, you will likely wonder what is tax deductible on your rental property. Tax write-offs can make a positive impact on your finances, and it is important not to miss any write-offs that are offered to you to maximize profits. There are many options for tax write-offs related to your rental property that can make tax day much better.
1. Mortgage Interest
Rental properties are often purchased using a mortgage, and the interest on the loan is tax deductible. This is often a large sum that landlords can write off on their taxes. This annual interest amount related to your mortgage is all tax-deductible, and it can be a significant value.
This deduction applies only to interest payments, not towards the part of the mortgage payment that is paying the initial loan amount. The monthly statement that you receive from the bank with which you have your mortgage loan should specify what portion is towards the principal loan and what is interest. Multiplying this monthly value by twelve months will give you the annual interest amount.
Additionally, interest on unsecured loans that you use for home improvements, credit card interest related to the rental property, origination fees and points related to the purchase of the property, and any fees and points associated with refinancing the property can also be deducted from your taxes.
If you are unsure what counts as extraneous interest or you do not know how to file these elements, it can be useful to work with a tax professional to avoid missing anything or accidentally writing something off that does not qualify for a deduction.
2. Property Taxes
Property taxes are collected in almost every state and by local governments, and the amount can vary greatly depending on the location of the rental property. Communicating with a tax professional can help you find the exact rate of property tax for the area where the property is located, or you can find it by analyzing your escrow summary.
If the area where your property is located had required licenses for renting, these associated fees can be written off on your yearly taxes. This depends on the location of the property and can vary greatly based on state and local requirements.
The IRS imposes a limit on the number of deductions that you can write off on your taxes, so it is important to note that sales and property taxes cannot have a combined deduction greater than $10,000 which is $5,000 per partner in a married couple of taxpayers who each file a separate return. Anything above this limit cannot be written off and it is very important to stay within these parameters.
Short-term rentals might have an occupancy tax depending on the location of the rental. This tax is also deductible along with any wage, social security taxes for any employees that you might have associated with the rental, sales tax related to the rental, and any inspection fees.
3. Insurance Premiums
Homeowners are often required to get insurance before they are granted a mortgage, and this will be a deductible expense. Basic homeowners insurance and liability insurance are both included in this deduction. Insurance premiums tend to be higher for rentals, but because they are tax write-offs this can offset additional costs.
If you have employees related to your rental business and they have health insurance and workers' compensation insurance, these are also deductible expenses.
Any losses such as those from floods, earthquakes, hurricanes, and theft can also be deducted by landlords in the unfortunate event of a natural disaster or crime conducted against the property.
Related Reading: Landlord Insurance Cost & Coverage
4. Real Estate Depreciation
The value of the property that you are renting might go down due to time, as the property experiences wear and tear. This is called depreciation and it can be written off on your taxes.
Depreciation can be claimed even without tenants, and it is able to be claimed as soon as the rental property is available for tenants. The value of the depreciation deductible is for the total expected life of the property and it has to be spread out over several years.
The depreciation value is only for the structure itself, not the land that the structure sits upon. Any equipment that is necessary for running the rental is also eligible to be deducted from your taxes which can include a car or computer.
Improvements that you make to the property which increase its value can also be written off, and these might include updating appliances, installing a new roof, or adding furniture that will benefit the property. Any improvements that you want to deduct from your taxes must be valuable to the rental, last for over a year, and must depreciate over time.
5. Maintenance and Repairs
Some improvements to the home are deductible based on depreciation values. However, it is also possible to deduct some costs related to repair and maintenance.
Maintenance and repair costs must be those that keep the property maintained to the point that it can be rented out, but they shouldn't add overall value to the property.
The IRS has outlined some home improvements as adding new rooms, adding heat and air conditioning to the unit, landscaping, insulation, plumbing, assorted repairs, and upgrades to the interior.
If someone else is hired to do work, such as outsourcing a plumber or electrician, the costs for labor are deductible. Any managers that work for the property can also have deductions for their time, and if the landlord does the work themselves, fees related to equipment used can be deducted. Any homeowner's fees or fees related to a condo development can also be deducted.
Landlords vary in how they deal with utilities, such as whether they pay for some, all, or none of them, such as heating, water, electricity, gas, and air conditioning. Any utilities that the landlord covers are deductible. Additionally, landlords who pay for cable, satellite, or internet can count these as utilities and write them off on their taxes.
If your tenants reimburse you later on for utilities based on an agreement that you make with them, you can still deduct these expenses from your taxes and then claim that reimbursement from your tenants as income on your taxes.
7. Legal Fees
Fees related to the tax professionals used to do the taxes on a rental can be deducted. Any legal fees that are related to paperwork based on the rental can also be deducted. Real estate agents that are associated with finding renters can also have their fees written off. Any advertising expenses can also be deducted.
Any fees related to legal processes such as evictions can be deducted from your taxes as well. However, legal fees related to the title of the property or the recovery of the property are not able to be written off on your taxes.
8. Transportation Costs
If you have to travel for purposes related to your rental property, such as traveling between multiple properties or traveling to a property that is a far distance from your primary residence, the costs related to transportation can be deducted from your taxes.
Any travel fees acquired when showing the rental property to prospective renters, collecting income related to the rental, and conserving the property at various points during the year are all deductible as well. However, reasonable, regular commutes are not deductible, and the write-offs are only for unreasonable travel at far distances.
These deductibles can be done using the standard mileage rate or actual expenses, so it is important to keep track throughout the year of any travel expenses to accurately be able to write them off on your taxes.
Related Reading: Is Landlord Insurance Tax Deductible
9. Office Space
Any office space in the rental property, whether it be a unit in a commercial property or a spare room, can be deducted from your taxes. You can deduct the rental cost of the area that you are using for an office, and you can also deduct things like a computer, software, and printer that you might use in the office.
It is important to only write off things that are related to your business, and people often mistakenly write off things incorrectly, which can create problems when doing your taxes.
Claiming Tax Deductions For Your Rental Property
All tax deductions should be done using a Schedule E form, which should be paid in the same year that you make the payments that you are writing off. It is important to keep track of all the expenses and income related to the rental property, especially in case you get audited and have to prove all of your deductions.
The tax process becomes more difficult if you also live in the property that you are renting. If you find that your taxes are becoming too confusing, it can be a good idea to hire a tax professional. Fees related to this tax professional can be written off, and it can prevent problems from arising if you end up writing something off incorrectly or miss something when doing your taxes.
If you choose to do your taxes, it is important to be thorough and keep proof of all income and expenses so that you can access it in case you are audited.