Property Management Blog

Are You Getting All the Tax Deductions for Your Rental Property

Property Management Blog

Owning rental property is popular for many reasons, including the number of tax exemptions available. Every year, real estate investors shortchange themselves on their tax returns because they do not claim their rightful tax exemptions. This blog outlines several deductions available to you. Keep in mind that tax laws can change quickly, and you should always check with your financial advisor before assuming you can take a deduction.

Mortgage Interest

The Internal Revenue Service (IRS) does not allow a tax deduction for the costs associated with obtaining a mortgage nor the principal payments. However, you can claim all interest you pay on the mortgage throughout the year. Your lender should send you a Form 1098 listing mortgage interest paid by January 31 of next year.

Maintenance and Repairs

You can deduct the expenses associated with routine maintenance and minor repairs such as purchasing a vacuum cleaner for the hallway or repairing a handrail. If you need to make major repairs or purchase new equipment for installation, the IRS considers that a capital improvement. Replacing the building’s roof is just one example. With capital improvements, you need to spread the cost of the equipment over several years to claim depreciation.

Other Common Expenses

The IRS allows rental property owners to deduct most expenses associated with the following:

  • Insurance
  • Lawn care
  • Losses stemming from theft, fire, severe weather, or another type of casualty
  • Taxes from previous year
  • Tax preparation fees

Be sure to keep receipts for services rendered or insurance claims from any losses you sustain during the year.

Travel Expenses

You can deduct 56 cents per mile for tax year 2021 for vehicle expenses related to driving to maintain your rental property or collect rent. You just need to be careful to classify your travel expenses correctly. For example, any mileage you accumulate to complete improvements on your property count as an expense that you must depreciate over time. 

People sometimes try to take advantage of the travel expense deduction by looking at an investment or two while they are on vacation and then writing off all miles driven on the trip as a business expense. This greatly increases the chances that the IRS will audit your tax return. If you do travel to look at potential properties to purchase, you must maintain detailed documentation to allow you to defend the exemption.

Home Office

You can only claim a home office deduction if you use a portion of your home exclusively for your real estate investing work. The IRS allows self-employed business owners who work out of their own home to deduct a percentage of their housing bill based on the square footage of the room or area where they work. IRS officials pay closer attention to the home office deduction than they used to, so be sure to only claim it for legitimate use.

Tenant Screening and Legal Forms

You could deduct the following expenses from your federal income tax return if you paid them and not your tenants:

  • Credit reports
  • Criminal background checks
  • Employment and income verifications
  • Eviction history reports
  • Identity verifications

Most states allow you to pass some or all these costs to your tenant, which would obviously save you more money than the tax exemption. If you had to purchase state-specific lease agreements, eviction notices, or property management contracts, you can deduct those expenses as well.

License and Registration Fees for Rental Properties

Some local communities require you as a landlord to purchase a license or registration before renting the property to others. You can deduct the cost if the community where you own a rental property has that requirement. You may need a vacation property license if you purchase an investment property for short-term rentals. This is also deductible.

Keep in mind that Schedule E of the IRS Supplemental Income and Loss form leaves space for miscellaneous expenses that do not fit into any specific category. Just be sure to check with your tax advisor before listing any miscellaneous deductible expenses as investment property tax benefits.

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