Current Articles | Categories | Search | Syndication

Top Three Tax Deductions for Rental Property Owners 400 Views :: 0 Comments :: :: Rentals Top Three Tax Deductions for Rental Property Owners Rental real estate provides some of the best tax deductions available to any investor. The following are usually the best three deductions. 1. Interest The largest tax deduction for a landlord is usually mortgage interest. You can deduct interest on loans you have taken to buy or improve your rental property. Let’s say you have a $200,000 loan on your rental property at 6% interest. The interest deduction is roughly $12,000 a year. 2. Depreciation on Real Estate Depreciation represents the decline in the value of an asset. The IRS decides what the useful life of an asset is, thus setting its depreciation period. As an example, a computer has a useful life of 5 years, and residential rental property has a useful life of 27.5 years. Rather than deducting the entire cost of your rental property in the year you buy it, the IRS says you have to deduct the cost over 27.5 years. Note that you can never depreciate the value of land. On a rental property worth $180,000, you can take roughly $6500 as a depreciation deduction each year. There?are various ways to calculate depreciation, refer to the IRS tax publications for an exact amount. 3. Repairs The IRS defines repairs as something that keeps your property in good operating condition. Repairs include repainting, fixing leaks, replacing broken windows. You can deduct the cost of repairs each year. Do not confuse repairs with improvements. Improvements are changes that add to the value of the property or prolong its useful life, such as replacing a roof. You depreciate these costs. Do the math to see the great tax benefit. Let’s say you are collecting $1200 a month in rent, or $14,400 a year. In the examples above, the top two tax deductions alone amount to $18,500. You will not pay any tax on the rental income you collect. More Tax Deductions for Rental Property Owners IRS Publication 527-Residential Rental Property provides added detail on the available tax deductions. Vehicle Expenses You can deduct any travel expense you incur to take care of your rental property. This includes going to the hardware store to get cleaning supplies as well as meeting a tenant at the property. When you deduct travel expenses, keep good records. IRS auditors like to take a close look at travel documentation to make sure you have a legitimate expense. To track vehicle expenses use one of two methods. The simplest is to keep track of mileage and then deduct 48.5 cents a mile driven (this is the 2007 rate; the IRS resets it each year). Alternatively, you can keep track of your actual vehicle expenses- gas, maintenance, insurance, etc. Improvements The IRS states improvements add to the value of the property and prolong its useful life. For example, replacing a roof falls under improvements, whereas fixing a leaking roof falls under the repairs category. With repairs, you can deduct the cost in the year you make the repair. The cost of an improvement is recovered over time through depreciation.The IRS sets different depreciation schedules depending on the “useful life” of the asset. Improvements are on the same schedule as the property itself, 27.5 years for residential real estate. While depreciation provides a benefit in the years you have the rental property, when you sell a rental the depreciation has to be “recaptured” thus you end up paying tax on the amounts you depreciated.