Maybe you recently heard that you could use your rental property as a tax write-off. You are thinking that this might be the solution to keeping more money in your pocket and out of Uncle Sam’s. Or maybe you had no idea about this, but the title piqued your interest. Now you’re wondering if it is true.
Is rental property a tax write-off? Yes, you can use your rental property as a tax write-off, and there are multiple deductions you can make.
The tax code was written for entrepreneurs and business owners. The government incentivizes individuals to build properties and provide housing by providing substantial tax breaks. Before claiming your deductions, speak to a CPA familiar with real estate tax deductions so that you can get the most out of your tax write-offs. Keep reading to learn about all the deductions you can make on your rental properties.
What Deductions Can You Make on Rental Property?
There are 11 main deductions you can make on your rental property. If you are a high-income earner, you will want to use this to your advantage to keep more of your money and have less of it going to the government. The best part of rental properties being a tax write-off is that you can deduct your expenses per property.
1. Interest Deductions
This deduction includes deducting interest paid on your mortgages, loans, and home equity lines of credit. You can use this deduction if you are using financing to acquire properties. To be clear, you cannot deduct the principal loan amount. This deduction only applies to interest charges.
You can also deduct interest on the following:
Unsecured loans used for home improvements.
Origination fees and points used to purchase or refinance a rental property.
Credit card interest on purchases related to your rental property.
Once again, speak with a CPA or certified financial advisor to determine how to file these extraneous interest charges, so you do it correctly.
2. Depreciation
Another expense you get to write-off is the depreciation on your home. It’s essential to get a cost segregation engineer for this. A cost segregation engineer is a CPA that will go around your home to help you depreciate certain items in your home in a way that you would not otherwise do. Some of the five-year depreciation categories they will include are
Plumbing
Appliances
Electrical System
You can also claim the value of any equipment you are using to run your rental business as well as improvements to your property that add value or extend the life of the home. Examples of this include installing a new roof, adding furniture, and updating household appliances.
The equipment needs to last a year or more to qualify as a depreciation expense. It also needs to be valuable to your business and lose value over time.
You can depreciate the home as soon as it is available for rent, even if you don’t have tenants, and you get to amortize the cost of the house every year for 27.5 years (i.e., the expected life of the property)!
The best part about this deduction is that real estate typically appreciates over time. Therefore, you will get to claim a depreciation deduction while your asset is appreciating!
For more on how to claim this deduction specifically, check out this article.
3. Travel
You can make this deduction for both local and long-distance travel. You get to deduct any trip you have to do to get to your rental property. A travel expense includes the mileage you use having to drive from one property to the next in your area. Keep track of the mileage.
If you have a business with multiple rental properties and have a car designated for your business, you can write off part of the vehicle as a business expense.
You also get to deduct expenses involved with long-distance travel. That’s why it is worth looking into real estate in other states if you live in a state where real estate is expensive. You get to write-off all your costs!
The deductions you get to make are on expenses involving the following:
Flights
Hotels
Rental Car
Dinners with potential or current clients or employees
Meetings with your team
4. Repairs
You are also allowed to deduct specific repair costs, separate from the depreciation expenses. To qualify for this deduction, the repairs must keep your property in rentable condition without adding significant value to the home. Examples of this would be painting, pest control, and landscaping.
You can make these deductions on your taxes in the year that you made the repairs. Whether you end up doing the repairs yourself or contracting/hiring someone else, you can write it off. Keep track of all your expenses involved with the repairs to deduct them properly when filing your taxes.
5. Home Office
If you run a business from home, you can claim a portion of your home as an expense if you have an office. Typically for this, you need a door, and you can only use the room as an office (i.e., you cannot also use it as a bedroom). Again, talk to a tax accountant about this.
The square footage of your home office will likely be the most significant expense. You can also include the price of a computer, printer, ink, a phone line, computer software, and anything else you need to manage your rental properties.
Make sure to keep documentation of any purchases you make and record how much time you spend using the home office equipment/supplies for business purposes instead of personal ones.
6. Employees
This deduction is used for when you hire contractors and have people on staff (aka employees that you pay.) If you are running a rental property business, this will be an important deduction for you because you can claim your employee’s wages on your taxes. You get to deduct social security taxes on your employees as well.
7. Casualty Losses
A casualty loss occurs when your property is damaged or lost through a sudden, unexpected, or unusual event. You can deduct these expenses in the year that the loss occurs.
The three types of casualty losses you can deduct are federal casualty losses, disaster losses, and qualified disaster losses. Examples of casualty losses can include floods, fires, earthquakes, hurricanes, and theft. However, speak to a CPA to find out whether or not your loss qualifies or check with the IRS.
8. Insurance
Insurance is a commonly missed tax deduction by property owners. Any form of coverage that you get for your home is considered an ordinary and necessary expense. Therefore, you can deduct the premium. This deduction applies to basic homeowner’s insurance, special peril, and liability insurance. You can also deduct the cost of health and worker’s compensation insurance for your employees if you have any.
9. Paying for Professional or Legal Services
Any professional or legal fees that you incur towards building or managing your business, you can write-off. This deduction includes prices you pay to inspectors, property managers, and lawyers.
For working with property managers, more specifically, those fees would consist of costs to do background checks on your tenants, work on the property, and having a lawyer draft up a contract. You can deduct all these expenses.
You can also deduct commissions paid to real estate agents as well as the cost of advertising.
10. Property Tax
Most state and local governments collect property taxes. These can range from a few hundred dollars to hundreds of thousands, depending on your rental property location(s). You can deduct this expense as well as any landlord/vacation rental license fees associated with rental licensing requirements. You can also deduct sales taxes and occupancy taxes.
11. Utilities
Another deduction that property owners frequently forget is utilities. A property owner will often forget this expense because the tenants are paying for most of the utilities. However, even if your tenants are paying for most of them, you should still deduct any utility expenses for which you are personally paying.
Even if your tenant agrees to pay you for the utilities later, you can deduct it from your taxes and claim the reimbursement as income.
Wrapping Up
There you have it. Now you know that you can take advantage of significant tax deductions for owning rental property. That’s why they say, “don’t ever stop buying.” The more rental property you buy, the more income you get to keep in your pocket. Great news!
