Allowable Deductions for Rental Property

Keep good records to maximize your rental deductions.

Keep good records to maximize your rental deductions.

Becoming a landlord can be a sweet way to own real estate and earn money at the same time, even though you have to pay income tax on money you receive from your property. If your rental home needs a lot of work, you can still benefit because you are privy to deductions that can slash your tax tab and put a serious ding in the cost of being a landlord.

Mortgage and Credit Card Insurance

They don't call the mortgage interest deduction the "granddaddy of all tax shelters" for nothing. If the mortgage on your rental property is in its early years, the interest on the loan makes up a huge chunk of your mortgage payment. If you itemize your deductions, you're golden -- although you're limited to a max of $1 million in mortgage debt if filing jointly and $500,000 if filing separately. At the end of the year, your lender must provide you with Form 1098 Mortgage Interest Statement, which you'll use when you file Form 1040 with the Internal Revenue Service. You can also deduct the points paid for your loan as well as credit card interest incurred doing business related to your rental property, according to Nolo.com.

Property Tax, Insurance and Depreciation

Property taxes on your rental property can add up to thousands each year. You can deduct local property taxes as an expense on your tax return. The insurance premiums you shell out that apply to the tax year for which you file are deductible expenses. Depreciation on the cost of your rental property is not fully deductible in the year you buy it; you must deduct the expense through depreciation over the expected life of the property, according to the Internal Revenue Service.

Utilities, Cleaning, Maintenance or Repairs

If you provide basic utilities to your tenant or hire a pool service or a gardener, these costs, as well as any cleaning fees you incur while preparing your property for rent, may be deducted from your taxes, as can repairs that keep your property in good condition but don't increase the value of the rental. Claim these and all your expenses on Form 1040 Schedule E - Supplemental Income & Loss.

Professional and Legal Fees

If you pay a property management service to take care of your property, these management fees are deductible. This includes commissions paid to agents who rent your property. Advertising costs you incur to rent out your property -- whether newspaper or online -- can also reduce your tax liability. Don't forget to deduct the fees you pay to your tax consultant, real estate attorney or other professional fees.

Local Transportation and Travel

If you drive your car while doing rental activity or otherwise travel to repair or maintain your property, itemize your local transportation expenses, including a percentage of repairs, oil, gasoline and insurance. Use either the standard mileage rate for each mile of business or deduct your actual expenses. The standard mileage rate changes frequently, but your tax adviser or software will calculate the correct allowance.

 

About the Author

Elle Smith has been an advertising professional for more than 25 years. Her work for ABC, CBS and Sony Pictures Television has appeared on radio, on air, in print and outdoors. In addition, Smith has more than 20 years experience in marketing, graphic arts, commercial photography and print production, and is a licensed real estate agent with property management certification in California.

Photo Credits

  • Hemera Technologies/AbleStock.com/Getty Images