Rental Properties: Top Tax Deductions to Look For
TL;DR - Document all of your rental property expenses (every single one). Then deduct your mortgage interest, property taxes, depreciation, insurance, repairs, utilities, employees/contractors, professional services, travel, home office, and advertising expenses from your rental property taxes.
DISCLAIMER: THIS IS ARTICLE IS STRICTLY INFORMATIONAL. CONSULT WITH TAX PROFESSIONALS FOR ACTUAL ADVICE.
It’s that time of year!
Each year in April we, as American residents, report all interest, dividends, wages, and income to the IRS. Depending on what you report, you’ll either get a tax refund or have to pay your taxes.
Now, whether you’re about to file your taxes or are preparing for next year, it’s good to understand all of the tax deductions you can take advantage of.
Especially if you’re the owner of rental properties! Because guess what?
You can completely negate most or all of your rental property taxes. All you have to do is understand these 11 rental property tax deductions…
Rental Property Tax Deductions
What’s Actually Taxed
You might think that only the rental income of your rental property is taxed, but that isn’t the case.
What is taxed is your total rental revenue minus all of your property expenses (a.k.a. deductions).
And if you’ve owned rental properties for a good amount of time then you know that they can get expensive. These expenses can completely offset your rental income and give you some awesome tax breaks.
You can use this knowledge to your advantage.
Want to fix that leaky sink? It’s a tax deduction. How about the cabinets that are falling apart? Another tax deduction.
By knowing your way around these rental property tax deductions, you gain power over your taxes.
So, without further ado, let’s get into them!
The 11 Best Rental Property Tax Deductions
You might not know this, but the US tax code was built around entrepreneurship.
The US government wants you to invest in the economy. To invest in your community. To invest in jobs for other citizens.
For that reason, you’re able to claim a lot more than you get charged for — if you invest.
Aren’t you lucky, you real estate investor you!
These are 11 of the best tax deductions for rental property investors.
1. Mortgage Interest
While you can’t deduct payments to the principal of your property, you can deduct the interest you pay!
Unless you bought your property in cash, chances are you have a mortgage loan payment.
Your loan payment goes toward the principal (the total amount you owe) and your interest.
All of the interest you pay on your property is tax-deductible. In fact, it’s probably the biggest tax break you’ll get all year.
2. Property Taxes
When you buy a property, it comes with local property taxes you have to pay.
These property taxes go toward improving the community around your property. Fair enough, right?
Well, they’re also tax-deductible. So while you’re helping your local community, you’re also getting a tax break.
3. Depreciation
We all know that, in general, property values appreciate over time.
But the government doesn’t see it that way. It actually thinks that a property’s value decreases year after year. According to them, residential property is worthless after 27.5 years.
So for every year that you own a rental property, you get to deduct how much your property has “depreciated” in value. That is, until the 27.5-year mark is hit.
Keep in mind, depreciation only applies to the physical structure or building you own. Not the land.
4. Insurance
All of your rental insurance premiums are tax-deductible. Fire, flood, earthquake, theft, and liability.
To put the cherry on top, you can deduct your employees’ insurance as well.
5. Repairs/Maintenance
The key distinction to be made here is between repairs and improvements.
Improvements, such as getting a new roof, are deductible through depreciation.
Repairs, like patching a leak, are deductible in their own right.
6. Utilities
Maybe your tenant pays for all of the utilities. Maybe you pay all of them yourself. Perhaps it’s somewhere in between.
Regardless, if you pay for them, they’re a tax break.
7. Employees and Contractors
Do you hire people to do work for you?
You might have a property manager that you pay monthly. Maybe you have a plumber come out to your rental property every few months. Or a painter that livens up the aesthetic of your property.
If you pay these people for their time, then you can write that off as a business expense.
8. Professional Services
As a business owner, it only makes sense to do what you do best — run your business.
That’s why you hire experts to take care of the things you don’t do well. Like attorneys for legal matters or accounts to keep your finances in good shape.
Similar to employees, you can deduct the cost of their services.
9. Travel
You’re bound to travel back and forth from your home to your rental property. Whether you want to check it out, talk to your property manager, or check in with your tenants.
If you’re an out-of-state investor, these travel expenses can be high. Flights, taxis, rental cars, and more.
Luckily, both local and long-distance travel expenses are tax-deductible. They just have to be for your rental properties.
If you’re traveling locally, make sure your home office is your main place of business. This will help you get the most bang for your buck.
10. Home Office
Do you work mainly from home? If so, you can write off the room that you use as your home office.
For a room to qualify, it must have a door and only be used for business purposes.
In addition, most of the things in your office are tax-deductible. Printers, computers, electronics of the like, and more.
11. Advertising
When your rental property is vacant, you need to attract suitable tenants to move in. How do you do that? Through advertising.
The good news is that this isn’t a sunk cost. You can write off the advertising expenses from your rental property for a nice tax break.
How Do You Claim These Tax Deductions?
When you file your annual tax return (Form 1040), you’ll attach up to three separate forms with it.
Use a Schedule E to claim rental property tax deductions.
Use Form 4562 to claim depreciation.
Use Form 4684 to report casualty or theft loss.
Don’t Make These Mistakes
One of the worst things you could do to ruin your tax deductions is not documenting all of the spending related to your rental properties.
All of these deductions are legal and claimable. But you need to have proof of them in case the IRS ever comes knocking.
Documenting everything will make your life 100% easier. And your accountant’s too!
Also, make sure to include every single expense that you can think of. After all, this is your money that we’re talking about!
If you can save even a little bit on your taxes, you should!
Follow these two steps, claim all of the rental property tax deductions listed above, and you’ll erase all taxes on your rental properties.
Happy investing!
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