Each year millions of landlords pay more in taxes for not knowing which deductions the Internal Revenue Service offers to those who invest in rental properties. In addition to the income, you earn from rent and the possible profits from appreciation of your capital, owning a property can reduce your income tax. In fact, rental real estate offers the most tax benefits compared to almost any other investment out there.
Here are the top ten tax deductions for owners of residential rental property:
Interest is often a landlord's single biggest deductible expense. Common examples of interest that landlords can deduct include mortgage interest payments on loans used to acquire or improve rental property and interest on credit cards for goods or services used in a rental activity.
One of the biggest headaches of owning rental properties is having to fix the damages that occur in the property. However, despite these drawbacks, you can deduct their cost in the year in which they are incurred. Good examples of deductible repairs include repainting, fixing gutters or floors, fixing leaks, plastering, and replacing broken windows.
3. Transportation & Local Travel-
The IRS will make deductions on your taxes if you must travel to your property to solve problems with the tenants or to make repairs. If you drive a car, SUV, van, pickup, or panel truck for your rental activity (as most landlords do), you have two options for deducting your vehicle expenses. You can deduct your actual expenses (gasoline, upkeep, repairs), or use the standard mileage rate. To qualify for the standard mileage rate, you must use the standard mileage method the first year you use a car for your business activity. Moreover, you can't use the standard mileage rate if you have claimed accelerated depreciation deductions in prior years, or have taken a Section 179 deduction for the vehicle.
4. Long Distance Travel-
If you travel overnight for your rental activity, you can deduct your airfare, hotel bills, meals, and other expenses. If you plan your trip carefully, you can even mix landlord business with pleasure and still take a deduction.
5. Employees and Contractors-
If you have employees that manage your rental properties or if you use a contractor, you can deduct from their wages or payment for his services as an expense.
6. Legal and Professional Services-
Any money you pay for services that are related to rental activities such as attorney services, rental management services, accountants, among others, can be deducted.
The actual cost of a house, apartment building, or other rental property is not fully deductible in the year in which you pay for it. Instead, landlords get back the cost of real estate through depreciation. This involves deducting a portion of the cost of the property over several years.
You can deduct the premiums you pay for almost any insurance for your rental activity. This includes fire, theft, and flood insurance for rental property, as well as landlord liability insurance. In addition, if you have employees, you can deduct the cost of their health and workers' compensation insurance.
9. Casualty and Theft Losses-
If your rental property is damaged or destroyed from a sudden event like a fire or flood, you may be able to obtain a tax deduction for all or part of your loss. These types of losses are called casualty losses. You usually will not be able to deduct the entire cost of property damaged or destroyed by a casualty. How much you may deduct depends on how much of your property was destroyed and whether the loss was covered by insurance.
10. Home Office-
Landlords may deduct their home office expenses from their taxable income. This deduction applies not only to space devoted to office work, but also to a workshop or any other home workspace you use for your rental business. This is true whether you own your home or apartment or are a renter.
A Few More Interesting Facts - Did you know that:
If you did not know one or more of these facts, you could be paying far more tax than you need to.
-Landlords can greatly increase the depreciation deductions they receive the first few years they own rental property by using segmented depreciation.
-Careful planning can permit you to deduct, in a single year, the cost of improvements to rental property that you would otherwise have to deduct over 27.5 years.
-You can rent out a vacation home tax-free, in some cases.
-Most small landlords can deduct up to $25,000 in rental property losses each year.
-A special tax rule permits some landlords to deduct 100% of their rental property losses every year, no matter how much.
-People who rent property to their family or friends can lose virtually all of their tax deductions..
Top Ten Tax Deductions For Landlords