Being a landlord requires a large investment of time and money. In addition to finding good tenants for your rental, you also need to maintain the property and make necessary repairs, which can sometimes be challenging. Together with the challenges come the rewards of being a landlord. Along with collecting the rent, you can use some tax benefits to make your rental property a good investment.
As with your primary residence, the interest you pay on your mortgage for your rental property is tax deductible. Also, property taxes and insurance are tax deductible. These payments are often included in your mortgage and are made through an escrow account by your mortgage company. Your mortgage company should send you a form 1098 at the end of the year showing these payments. Use the amount shown on this form to report your interest payment deductions.
Owning rental property is a business endeavor, and like in other businesses, you can deduct the cost of doing business on your taxes. Some of these costs include legal fees related to the property, commissions to rental agents, homeowner association dues, utilities for the property and advertising to rent the property. Payments to property management companies, contractors hired to make repairs and resident managers are also tax deductible.
Repairs made to your rental property are tax deductible. However, it is important to note that improvements to the property are not tax deductible. Replacing a broken lock on a door would be a repair, while replacing the entire door would constitute an improvement unless the door was no longer functional. A repair maintains your property in good rental condition, while an improvement adds value.
Depreciation occurs when the value of something shrinks due to regular use. The IRS calculates depreciation based on the expected lifetime of the property. Appliances and carpeting are generally depreciated over five years and the house’s value is usually depreciated over 27.5 years. Note that the IRS separates the home from the land, and the land the home sits on is not depreciable. The IRS assigns a percentage of depreciated value based on when the home was ready for renting, regardless of whether it was actually rented at that time. Using depreciation, you can recoup the cost of buying rental property. Once the full amount of the original cost has been regained, you can no longer deduct a depreciated value. If the property ceases being rental property, you cannot take the deduction.
The tax benefits of rental property are great incentives, but you cannot prove you are entitled to deductions unless you keep accurate records. Keep all receipts and invoices. You can deduct the cost for an accountant to do your taxes and the time you spend record-keeping for your property.
- Hemera Technologies/AbleStock.com/Getty Images
- How Do I Calculate a 30-Year Fixed Mortgage?
- How Much Does a Mobile Home Depreciate Each Year?
- What is a Betterment Tax?
- Tax Consequences of Converting a Rental Property Back Into a Dwelling
- How Does an Escrow Account Work for a Land Contract?
- Can I Claim Home Additions on a Tax Return?
- How to Deduct Depreciation When You Own a Home and Rent a Room
- Depreciation of Inherited Property