Attention Landlords: Don't Miss These Tax Deductions

Written By
Paul Tracy
Updated January 16, 2021

Investing in rental property can be a smart move. Few investments provide ongoing income month-to-month like real estate.

Real estate also has the potential to appreciate in value while still generating monthly income. Yes, one of the drawbacks of rental property is the tax owners must pay. Fortunately, there are a number of exemptions and write-offs that are possible for rental property owners.

As tax season begins, here are seven deductions rental property owners can look forward to:

1) Travel Expenses

Keep tabs on any time you travel to the property to make improvements or collect rent, as that can be deducted. On your taxes, you can either take a standard mileage rate (55 cents per mile in 2012), or deduct actual expenses including gas, upkeep and repairs.

2) Mortgage Expenses

Similar to homeowner mortgages, rental property owners can write off the interest paid on their mortgage. The mortgage company will send you a Form 1098 that tells how much interest you paid the previous year.

Unfortunately, one-time expenses at closing -- such as commission and appraisal -- aren't fully deductible in the year that you pay them. Instead, you can amortize them over the life of the loan, still leaving you with a hefty deduction.

3) Lawn Care or Association Fees

If you own a home and have a lawn service cut the grass or manicure gardens, those expenses can be written off as well. Association fees that condo associations often use to cover lawn care, exterior maintenance and the upkeep and maintenance of other common areas are also deductible.

4) Repairs

Property owners know the drill -- when something breaks, you have to fix it. From furnaces to dishwashers, the landlord foots the bill. The good news is that repair and maintenance costs are tax deductible.

The distinction is a repair that keeps your property in good working order. If something breaks or could potentially break and you spend the money to replace or update it, the cost is considered tax deductible.

However, it does mean that you write off strictly cosmetic updates, like adding granite countertops to a kitchen, unless the previous counters were faulty. For cosmetic improvements, you have to depreciate the expense over the life expectancy of the property.

5) Taxes and Preparation Fees

The funny thing about taxes in investment properties is that you are allowed to deduct them. If you have someone else prepare your taxes, like attorneys or accountants, those expenses can also be written off.

6) Insurance and Losses

The cost of insuring the property can be written off along with any losses from casualties, like burglaries or natural disasters such as tornados, hurricanes or floods.

7) Depreciation

The IRS allows rental property owners to deduct depreciation of the value of a rental property. The assumption is that since property is useful for a long time, over that time, it wears out and is worth less money. Thus, you shouldn’t be taxed on the same value as when the property was purchased.

You calculate depreciation by adding up the total costs of the property and dividing it by the useful life of the property Anchor. For residential rental real estate, the useful life expectancy is 27.5 years. So, you would take the total value and divide it by the useful life to discover the depreciation.

For example, if you purchased a rental property for $150,000, you would divide that number by 27.5 for a depreciation of $5,455 per year.

A Word of Warning

As with all tax-related details, it is vital to keep excellent records to back up all your newfound tax deductions. If you are audited, the last thing you want to do is get penalized and pay more tax than you really should just because you don’t have the proper documentation. For further peace of mind, consult a tax professional to help you get the most tax deductions you deserve and organize your documentation.

The Investing Answer: Rental property can be a great investment and the tax deductions you can receive can make it even more appealing. Do a little research and hire a professional to ensure that you get the most deductions possible on your rental property.

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