The annual tax deadline is on its way for most American citizens. Although it can be stressful getting your expenses in order in time to file a return, it can also be valuable to reflect over the last year as a property owner and evaluate your investment’s profitability.
Leasing a property provides the benefits of income to cover mortgage payments, additional cash flow to supplement your salary, and tax advantages if you calculate your deductions correctly.
To make sure you are taxed on the lowest amount of rental income, here is a list of eligible deductions for a real estate rental:
Home or property insurance refers to the financial coverage you pay monthly or yearly to protect your property in the event of fire, theft or other damage. You can deduct this entire figure if you use a property solely for the purposes of tenancy.
Any loss occurred from a fire or flood may also be included in your deductions. The amount you are allowed to deduct depends on your insurance policy.
As real estate investors, you are probably familiar with property tax. This is the amount you pay to a local municipality for your rental property. It funds the maintenance of streets, parks, schools, libraries, as well as many more public services and infrastructure. This amount, along with your mortgage interest, will count as a large portion of your rental property deductions.
Mortgage interest is a percentage of your full mortgage amount that is added onto your mortgage payments. Interest from your rental property mortgage can be deducted from your income.
Repairs and Independent Contractors
Repairs in a rental property can be written off in your tax return. However, it’s important to differentiate between property repairs and improvements. A repair refers to fixing damage caused by a tenant or wear and tear. Damage could include a hole in the drywall, cracked toilet seat or broken screen door. Keep track of the expenses (materials and labor) you paid to repair a leak, crack or tear.
If you hire an independent contractor to repair damage, these labor costs can also be deducted from your annual income. It’s important to note that your own labor for repairing damage cannot be deducted.
While repairs occur out of necessity, improvements (capital expenses) are made to increase the value of a property. Therefore, landlords cannot deduct an improvement in the year it was made, but rather recover these improvement costs over the useful life of the rental property by reporting depreciation.
The IRS has certain requirements for property depreciation, where you can review the proper depreciation calculation methods and other components of depreciation.
There are exceptions to deducting improvements that are made to accommodate an illness or disability, such as wheel chair ramp, lifts or wider doorways.
Other repair costs may include equipment rentals. You can deduct the rental fee for leasing equipment, such as a steam cleaner or pressure washer to clean the unit. Whereas, if you purchase a steam cleaner, it is considered a capital investment.
Advertising involves any means of marketing used to attract tenants to your property. This can include online, print or sign advertisements.
According to the IRS, “you can deduct the ordinary and necessary expense of traveling away from home if the primary purpose of the trip is to collect rental income or to manage, conserve or maintain you rental property.” Most commonly, gas and vehicle maintenance would be included in travel expenses.
They go on to note that you cannot deduct these travel expenses if the primary purpose of the trip is for the improvement of your rental property.
It’s important to review your region’s tax rules for local and long-distance travel before claiming vehicle expenses because deductions can vary with each real estate owner’s circumstance, including your reason for travel and the amount of property you own.
The wages you pay property managers, landscapers, or office staff to run your rental property can be deducted from your rental income.
Rental of Property
If you lease a property in which you do not own, but pay a rental cost, this amount can be deducted from your income.
Utilities, such as gas, water, heat and electricity you provide tenants can be deducted. Alternatively, if utilities are paid by the tenant, you cannot deduct the expenses.
Money you spend on general outdoor maintenance, including fertilizing the lawn or snow removal, is deductible. Conversely, money you invest in a new landscape design falls under a capital investment.
The fees you incur from hiring a professional accountant to do your rental taxes or any consulting fees relating to your property, such as a lawyer, can be included in your deductions.
Other expenses may qualify as deductions. For example, if you send a past tenant their mail because it is still being directed to their old address (your rental), you can deduct the cost of stamps or sending expenses. Phone bills for a separate rental phone line could also be included in this category, as would pest control costs.
Consult an Accountant
Before completing your tax return and identifying your deductions, you should always consult with a Certified Public Accountant (CPA) to help better understand the tax specifics for your property.
The above deductions will be depend on your rental situation, and more specifically, whether you lease a building with several units, a single dwelling home, or a room/basement within your own home. An accountant will be able to calculate the portion of deduction you can include in your return and advise you on depreciation and other tax information.
Each region also has different tax requirements. US real estate investors should review the IRA residential rental property policy and Canadian investors should refer to the Canada Revenue Agency for insight into their property deductions.
Keep Proper Records
To help you see the most tax benefit from your rental property, keep accurate and organized records. Receipts, invoices and bills should all be kept in a safe place. Orderly records will make your tax experience less stressful and save you from rushing to compile all your documents right before tax day.
If you experience a loss in the early years of rental ownership, don’t be dismayed. It can take a few years to learn the ropes, and familiarize yourself with tax laws and deductions before you see the true value of your investment.
Do you have any tax tips to add? Share your thoughts below!