Aside from the extra income itself, one of the best incentives for investing in rental property is the numerous tax deductions the government allows you to take. In fact, many rental property owners sell themselves short by paying too much in taxes to the IRS, simply because they are unaware of certain deductions for which they may be eligible. If you are investing in rental real estate, here are some of the most common rental property deductions you should know about.
DEPRECIATION
From the moment the rental property is ready for tenants, it starts to depreciate in value in the eyes of the IRS. You can claim this annual depreciation as a tax deduction even if the property is vacant. Total depreciation is spread over 27.5 years for residential property and 39 years for commercial property, so if the value of your residential home rental is $250,000, you can claim a deduction of just over $9000 per year. If you conduct improvements on the property, this can also be worked into the value of the home and increase your deductions. The overall depreciation rate can also be accelerated to an extent by a process called cost segregation, in which you deduct components and improvements separately (for example, the government allows you to depreciate appliances and carpeting over 5 years instead of 27.5).
INTEREST
Any interest you pay that is directly related to your rental activity (e.g., mortgage interest, credit cards you use for repairs) can be deducted from your taxes.
INSURANCE PREMIUMS
Most insurance premiums you pay relating to your rental property can be claimed as deductions. These may include landlord liability, flood, fire, and theft insurance, as well as any health or workers’ compensation insurance you pay on your employees.
REPAIRS
If you have to conduct repairs on your rental property, the cost of those repairs can be deducted from your taxes for the year in which the repairs are made. (Important: repairs are not the same as improvements, which must be depreciated rather than deducted. If you have any confusion as to which is which, consult your tax accountant.)
TRAVEL
Travel is one of the most commonly overlooked deductions by rental property owners. The government affords you certain deductions for any type of travel related to your rental business. On the local level, you can claim this deduction either by documenting the upkeep and expenses on the vehicle you use, or claim the standard rate per mile. For long-distance (overnight) travel, you can even deduct such things as airfare, meals and hotel bills.
EMPLOYEES, CONTRACTORS, AND PROFESSIONAL SERVICES
If you have employees on your staff to help you with your property, you can claim their salaries as business expenses; the same with any independent contractor you hire. Additionally, any fees you pay to property management companies, accountants or attorneys as part of your rental business are deductible expenses.
As you can see, there are many ways to claim rental property deductions and save on taxes. As a final note, it is the prerogative of the IRS to investigate any activity that it deems questionable, but as long as you keep accurate records and receipts of the deductions you take, you’ll have no problem answering their questions.
