If you own rental real estate, great! A rental property is not only a great source of passive income (in fact, it’s one of the best-established real estate investment strategies around), but it can also provide additional financial benefits in the form of tax deductions. To help offset the time and money that you spend managing your rental property, the IRS allows you to deduct a variety of associated expenses from your rental income. For many rental real estate owners, these deductions can make the difference between an investment that is highly profitable and an investment that is only moderately so. Therefore, it’s important to be aware of all the deductions that are available and to make sure you’re taking advantage of those that you’re eligible for.
The six most important deductions you need to know about as a rental property owner include the following:
If you took out a mortgage to purchase your rental property, the interest you’re paying on it is very likely one of your biggest expenses. Fortunately, it’s also one of the largest deductions that eligible rental real estate owners can make. To calculate how much you can deduct, check out your monthly mortgage statements; you’ll see that the amount that goes toward the loan principal and what you pay in interest are listed separately, so it’s easy to add up the total interest you pay for each year. Along with mortgage interest, you can also deduct interest on any unsecured loans you took out to pay for property improvements as well as any credit card interest on rental property-related purchases.
2. Property tax
The property tax that you pay to your state and/or local government is typically based on the value of your property. This means that if your rental property has a high assessed value (for example, if it’s in a desirable area or if you’ve made significant improvements to it), your property tax bill could add up to thousands of dollars every year. The good news is that, like interest, property tax is tax deductible for rental real estate owners. To find your area’s exact tax rate, you can check your escrow summary or contact the relevant department of your municipal government.
3. Insurance premiums
Before giving you a mortgage, many lenders will require you to have an insurance policy in place (and even if this requirement doesn’t apply to you, having insurance is still a smart move if you’re planning on being a landlord). As they are an ordinary and necessary rental property expense, according to the IRS, insurance premiums are deductible. This goes for any form of insurance you take out on your property, from basic homeowners insurance to special peril and liability insurance. And should the worst happen and your property suffers damage from incidents like an earthquake, flooding, or theft, you can also deduct any losses you incur.
Depreciation is the formal term for the natural wear and tear that lowers the value of a rental property over time. In allowing depreciation to be tax deductible, the IRS helps owners offset the perceived loss of value of a gradually aging asset. The most important thing to understand about depreciation is that you can’t write it off all at once; instead, the deduction is spread out over 27.5 years, which is what the IRS considers to be the life span of a property. What this means in practical terms is that you can claim a certain amount for depreciation during the first year that your rental property is placed in service and then continue to make a similar claim each year thereafter. Ultimately, you’ll likely come out ahead. The big benefit of being able to claim depreciation on your rental property is that while real estate is perceived to lose value annually in the eyes of the IRS, on the market it is much more likely to appreciate instead over time.
5. Maintenance and repairs
If you make repairs to your rental property or spend money on maintenance, you’re able to deduct those expenses during that same tax year. Keep in mind that for repairs and maintenance to qualify as tax deductible, their primary purpose must be to keep the property in rentable condition rather than to add significant value. For example, fixing the plumbing in the bathroom would be a legitimate maintenance expense, but a complete bathroom remodel would not (work like this falls into the category of improvements, and costs in this category are recovered through depreciation).
6. Travel and transportation
Did you know that as the owner of a rental property your travel and transportation expenses associated with that property are deductible? This may not matter much if your rental property is close by, but if you own rental real estate far from your home or if you regularly travel around to multiple rental properties, your transportation expenses can add up. To deduct them, you can use your actual expenses or what is known as the “standard mileage rate” for business use.