The Internal Revenue Service allows a variety of tax breaks for owners of rental property. Nearly every expense related to earning taxable rental income can be deducted or depreciated. Report rental income and expenses on Schedule E and keep careful records. If you own a partial share in a rental property, you can only write off amounts prorated for your ownership percentage. If you live in one of your own properties, you won't be able to deduct the portion of expenses for your own living space.
The Definition of Gross Receipts for a Rental Property
As you've probably inferred from the name, gross receipts include any money you receive in relation to your rental property, not just rent. If you get a deposit, first or last month's rent, a lease-cancellation fee or even the quarters in the washing machine, the IRS calls that "gross receipts." Of course you'll deduct your expenses before determining any taxable amount for your federal return. In some states or cities, sales or business tax is levied on gross rather than net income.
Can You Claim Interest on Rental Property Mortgage?
Interest on rental property mortgage is a standard allowable expense for rental real estate. You can even deduct the interest on a loan or credit card used to pay for rental repairs, maintenance or other supplies. However, if you refinance a rental property, any non-interest costs of obtaining the loan are written off over the life of the mortgage. Report mortgage interest for the rental property on line 13 and interest on other loans or credit cards on line 14 of Schedule E.
Can Rental Property Improvements Be Tax Deductible?
The IRS differentiates between improvements and repairs. Improvements increase the value of the property while repairs restore it to an original condition. And that's the difference between writing off the repairs in full in the year you pay and depreciating the cost of improvements. You're required to depreciate the cost of improvements over the life of the property: that's 27.5 years for residential rentals and an incredible 39 years for commercial real estate. Repair expenses go on Schedule E, but use Form 4562 to write off improvements.
How Much Reserve Should Be Set Aside for the Operating Expense of a Rental Property?
One of the downsides to owning rentals is that even if you don't have a tenant, you still have bills to pay on the property. Budgeting for the year ahead can help avoid shortfalls. Tally up the monthly, quarterly and annual expenses your property requires: mortgage payments, property taxes, maintenance, utilities, insurance, local taxes, income taxes and anything else you reasonably expect to pay during the year to calculate your average monthly cash needs. Older properties may have serious problems to budget for.
Consult your local city housing department for vacancy rates to estimate how long your unit might go unrented and plan for a reserve of at least that length of time. A rule of thumb is to allow one month of vacancy per unit. Adjust if your property or neighborhood has particularly high or low turnover, and consider the credit profiles of your current tenants.
Can HOA Fees on Rental Properties Be Tax Deductible?
Homeowners' associations seem to be about as popular as mothers-in-law. They often levy high monthly fees as well as assess amounts for repairs, upkeep and improvements. You can write off all the fees, though some of them are annual expenses, like property maintenance and gardeners' charges, while others, like a new roof, paving the parking lot or extensive landscaping are considered improvements and must be depreciated over the life of the property. Request detailed statements of how any monies are to be spent so you can make the correct deductions on your Schedule E.
Naomi Smith has been writing full-time since 2009, following a career in finance. Her fiction has been published by Loose Id and Dreamspinner Press, among others. She holds a Master of Science in financial economics from the London School of Economics and a Bachelor of Arts in political economy from the University of California, Berkeley.