Tax season may have passed, but it isn’t too early for income property owners to take steps to lessen their tax burden. From mortgage interest to vacancy advertisements to water bills, nearly every expense related to a rental property can offset rental income on owners’ federal tax bill. For that reason, it’s good to know about rental property tax deductions.
But despite the long list of tax benefits, legal and accounting experts say landlords often miss out on some advantages and end up paying too much in taxes.
“Taxpayers should ensure they are maximizing every tax benefit possible to offset rental income,” said John Caldwell, managing partner at Malvin Riggins & Company, a CPA firm with local offices in D.C., and Northern Virginia. “Expenses incurred, even while a rental is vacant, are deductible, so long as you are actively pursuing a rental.”
Following are some typical tax deductions. Always consult a tax specialist for advice pertaining to your investments and particular tax situation.
Mortgage Interest, Property Taxes, Insurance
Mortgage interest, real estate taxes and depreciation will typically offer a property owner’s largest deductions, Caldwell said. Owners should look out for Form 1098, which details mortgage interest paid, from their mortgage company.
Homeowners insurance costs, homeowners’ association fees or dues and monthly utility bills may also be deducted annually.
The IRS allows owners to depreciate, or deduct a percentage of the value of the building (not land), as long as it is used as a rental. Residential rentals are typically depreciated over 27.5 years, allowing an annual deduction of about 3.6 percent of the building’s adjusted cost each full year of use. For example, if the value of a rental house in a given tax year is $300,000, excluding land costs, the owner could typically deduct approximately $10,908 of the value.
Repairs and Improvements
Owners can deduct the cost of repairs to their property, such as having a plumber fix a leaky faucet or replacing a part for the dishwasher, in the tax year the repairs are made.
But buying a new water heater, installing new windows and upgrading the kitchen counters are considered improvements by the IRS and must be depreciated gradually over the expected life of the product. For example, the cost of new carpeting and appliances installed in a residential rental is typically deducted over a period of five years, with the time and percentage deducted each year determined by IRS schedules and the method of depreciation used.
Employees and professional services
Pay for managers, cleaning crews and repair workers and fees for lawyers, tax preparers and other professionals are all deductible.
Owners who hire property management companies can also typically deduct management fees as business expenses. As an added benefit, management companies will keep track and keep records of all expenses and income related to the property, ensuring it is organized and available to maximize deductions at tax time.
Travel and Home Office
Local mileage and long-distance travel are deductible if the main purpose of the trip is managing the rental. Landlords who use a portion of their home as an office for managing their rental may be able to deduct expenses for the business use of their home.
There are very specific rules for deducting rental losses incurred, so consult your tax advisor for more detail, Caldwell said.