Stocks and bonds are among the investments subject to taxes over and above the simple income tax. However, landlords can receive some generous tax benefits from owning rental properties. Tax benefits associated with rental income aren’t enough to buy rental properties, but they’re worthwhile to consider if you’re looking for investment options and important to keep in mind if you are a landlord.
Any person considering or owning a property needs to be aware that tax results can vary depending on your specific facts and circumstances. Consult your tax advisor or certified public accountant to determine the tax implications of owning rental properties.
The following are a dozen tax benefits you can enjoy as a proprietor of a rental property:
- Renter’s repairs are generally deductible the year they’re made. In cases where larger projects are classified as improvements, depreciation might be required to be deducted rather than deducted, so make sure this is something your accountant can help you with. Your rental income could be reduced by plumbing, heating, electrical or carpentry repairs.
- Landlords can deduct interest expense in a variety of ways, including mortgage interest. Mortgage interest is usual the largest deduction landlords can claim. For property-related expenses, you can also deduct home improvement loan interest and even credit card interest.
- Tax deductibility: This deduction is like receiving a gift of cash in the form of a deduction. It does not require you to spend any money to receive it. Depreciation for buildings and land are both deductible each year (land value is not deductible).
- Marketing: Advertising your rental property in local newspapers, magazines, or on rental property websites is tax deductible.
- Travel expenses: Local and long distance expenses both qualify for this deduction, as long as they are related to rental property activity. Typical travel expenses might include:
Showing a prospective tenant the property
Conducting market research or looking for homes to buy
Attending an investor seminar – ask your accountant what expenses you can deduct for travel, lodging, car rentals and other expenses
Purchasing materials at a hardware store - Expenses related to independent contractors: You may hire landscapers, painters, or exterior cleaners as independent contractors. You can deduct the amount you pay them.
- Employee expenses: If an employee performs maintenance or management tasks rather than a contractor, their wages can be deducted from income.
Investing in a home must be insured, and if it’s a mortgage, it must be insured as well. Renters must deduct insurance premiums, such as property, liability, and casualty insurance. - Local property taxes: You can deduct local property taxes as well as county, city, and school taxes.
- Property loss resulting from a break-in, a fire, or something else beyond your control are normally totally deductible. This would include only expenses not covered by insurance, which would include deductibles paid on a claim.
- Services in accounting, legal, and management: You might hire professionals across these disciplines, and their salaries are deductible in the year they are paid. You can deduct a portion of the cost associated with hiring a management company from your rental income tax if you hire a company to take care of all of the headaches of rental property ownership and tenant relations.
- Using rental loss to offset other investment income: You can use a rental property’s loss to offset income from other investments in some instances. What would make you lose money? When your depreciation deduction is significant, you can lose a significant amount of income without spending any additional money. It is possible to have a great cash flow, yet show a paper loss when including depreciation and mortgage interest. Make sure that this deduction applies to you by checking with your accountant.
Tax breaks for rental income can help you save a lot of money at tax time and enhance your investment. You should discuss these tax deductions with your tax preparer to determine if they may be beneficial to you.
Some rental properties may have suffered losses due to the coronavirus pandemic. However, tax relief provisions in legislation passed by Congress in 2020 could help. Here is an overview, but consult a tax professional to determine whether these provisions apply to your circumstances.
For more detailed information and publications specific to rental income and expenses, visit the Internal Revenue Service website.
