Rental Property Tax Deductions for Landlords
Owning a rental property can be a great way to generate income, but it also comes with some tax responsibilities. As a landlord, you need to report your rental income and expenses on your tax return, and you may be able to deduct some of the costs associated with running and maintaining your property. Here are some of the most common rental property tax deductions you can take as a landlord.
Mortgage Interest
If you have a mortgage on your rental property, you can deduct the interest you pay on the loan. This includes any interest you pay on a second mortgage, a line of credit, or a home equity loan you took out to purchase the rental property under the “Tracing rules”. You can also deduct any points or origination fees you paid to get the loan, as well as any prepayment penalties or late fees.
To claim this deduction, you report the amount of interest that you paid on Schedule E. Your lender will give you form 1098 showing the mortgage interest you paid during the year.
Property Taxes
Another major expense you can deduct as a landlord is the property taxes you pay on your rental property. This includes any state, local, or foreign taxes based on the value of the property.
To claim this deduction, you report the amount on Schedule E as well.
Depreciation
Depreciation is a way of recovering the cost of your rental property over time. You can deduct a portion of the cost of the building and any improvements you made to it each year as an expense. However, you cannot depreciate the cost of the land, since it does not wear out or lose value.
To claim this deduction, you need to use Form 4562, Depreciation and Amortization, and attach it to your tax return. You also need to know the basis of your property, which is the original cost plus any improvements, minus any depreciation you claimed in previous years. You also need to know the recovery period for your property, which is usually 27.5 years for residential rental property.
Operating Expenses
Operating expenses are the costs of running and maintaining your rental property. You can deduct any ordinary and necessary expenses that are directly related to your rental activity, such as:
- Advertising: You can deduct the cost of advertising your property for rent, such as newspaper ads, online listings, signs, flyers, etc.
- Utilities: You can deduct the cost of utilities that you pay for your rental property, such as electricity, gas, water, sewer, trash collection, etc. If you share utilities with your tenant or another unit, you need to allocate the expenses based on usage or square footage.
- Insurance: You can deduct the cost of insurance premiums that cover your rental property, such as fire, theft, liability, flood, earthquake, etc. You can also deduct the cost of landlord insurance that covers losses due to damage or nonpayment of rent by tenants.
- Repairs: You can deduct the cost of repairs that keep your property in good working condition, such as fixing leaks, painting walls, replacing broken windows, etc. However, you cannot deduct the cost of improvements that add value or extend the life of your property, these items would need to be added to the basis of the house and depreciated
- Maintenance: You can deduct the cost of maintenance services that keep your property clean and safe
- HOA Fee: You can deduct the HOA Fee, add it under the “other” category of Schedule E.
- Mileage on your car: Track the miles that you drive for the rental property and you can deduct them!
- Hiring your Kids: If you have any kids that help with managing the rental property, you can hire them and deduct the expense as “Other” category.
Conclusion
If you have a rental property and want to know about what type of deductions you can take, call us or fill out a contact form by Moontree Tax Service today! We have many years of experience with rental real estate and can answer all questions you have. You can also visit the IRS publication on Rental Real Estate.
