From repairs and maintenance to mortgage interest, operating a rental property can involve many expenses. However, you can claim a wide range of tax deductions related to both operating the property itself and even operating a business.
1. Deductions for rental costs
One of the most important aspects of owning rental property is the fact that you can deduct certain expenses on your personal income tax return, according to Paul T. Joseph, lawyer, CPA and founder of Joseph & Joseph Tax & Payroll in Williamston, Michigan.
âAll expenses directly related to care, upkeep, upkeep, replacement of personal property and repairs to property can be deducted,â he says.
Tax deductions for rental property can be numerous: this can include furnace repairs, new interior paint jobs, lawn mowing services and more. All maintenance costs can also be deducted, including cleaning costs such as moving / move-in cleaning between tenants. You can also deduct current expenses like home insurance and property taxes. There is also the slightest thought of elements to be deducted, such as mortgage interest, advertising, utilities and travel expenses.
However, don’t confuse maintenance and upkeep with property improvements, which are handled differently. As the IRS notes, you cannot deduct the cost of the improvements. Instead, you can “recoup some or all of your improvements” by using Form 4562 to report depreciation from the first year you rent your property and from any year you make improvements. subsequent. However, “only a percentage of these expenses is deductible in the year they are incurred,” they note.
2. Eligible deductions from business income
According to IRS, owners of sole proprietorships, S corporations, partnerships and certain trusts / estates may be eligible for the qualifying business income deduction. This is also called section 199A.
Qualifying taxpayers may be able to deduct up to 20% of their qualifying business income, as well as 20% of qualifying dividends from real estate investment trusts and qualifying income from publicly traded partnerships. So, depending on how you manage your rental property as a business, you may be eligible for this deduction.
3. Tax deductions for depreciation of rental properties
Riley Adams, CPA, senior financial analyst at Google and owner of the Young and the Invested website, says you can also claim your property’s depreciation deduction on your taxes. Depreciation allows homeowners to write off some of the loss in value of property structures due to age, wear and tear and basic deterioration. For residential properties, depreciation is generally deducted over 27 1/2 years.
Adams also notes that a strong tax shield for rental property comes in the form of a MACRS depreciation, or modified accelerated cost recovery system. This tax item helps accelerate depreciation charges, thereby decreasing taxable income in the present while increasing it in the future, he says.
With MACRS depreciation, the owner of a rental property can realize a lower net present value in terms of tax burden because a dollar today is worth more than a dollar tomorrow.
A key point about rental depreciation is that it is a significant tax benefit when you rent out, but when you sell the property the depreciation is treated as section 1231 income and is taxed. , as well as any associated capital gains. This can lead to shocking tax bills when you sell rental property.
4. Other expenses associated with the operation of a business
You will also be able to find tax deductions for rental property related to operating a business. For example, if you use part of your home for your business, such as having a home office, you might be able to deduct a certain amount related to the use of your home for business purposes. However, the home office should operate for regular and exclusive business purposes and the home office should be your primary place of business, depending on the IRS.
Another area where you may be able to deduct expenses is if you have employees or contractors. If you employ a property manager or hire people to repair the property, for example, the wages paid may be deductible.
In addition to the other costs of running a business, you can also deduct any legal or other professional fees that you incur. For example, if you have to pay legal fees as part of setting up an organizational partnership, it could be considered a business expense in your business. You may also be able to deduct costs related to other business expenses such as those incurred by accountants, bookkeepers and tax preparers in connection with the direct and necessary operation of the business.
5. Deductions for loss of rental property income
In terms of rental property tax deductions, you have to cover the cost of repairs, maintenance, taxes, insurance, depreciation, and all other expenses associated with the property. However, under current law, you are limited to deducting losses that exceed income of $ 25,000, Joseph says.
âSo in effect, if you had an income of $ 20,000 and expenses of $ 50,000, you could only deduct $ 25,000,â he says. From there, you may be forced to defer the additional $ 5,000 of expenses to future years or when the property is finally sold.
However, your ability to deduct losses even then is limited if your income is too high. According to the IRS, your ability to write off $ 25,000 in losses is reduced by 50% if your modified adjusted gross income (MAGI) is greater than $ 100,000. Once your MAGI exceeds $ 150,000, you lose the ability to fully deduct lost rent.