The Best Rental Property Deductions for Landlords

One of the most popular ways of building wealth is to acquire a rental property. Luckily, the U.S. tax code has many rules that allow rental property owners to save money and reduce their tax liability. As a landlord, you will be able to gain wealth not only from the appreciation of your investment property but also from the favorable tax rules. It almost seems that the IRS is trying to promote and reward real estate investing. Let’s take a look at available rental property deductions.

Two Types of Expenses

There are two types of expenses rental property deductions fall under, current expenses and capital expenditures.

Their are a number of tax deductions for rental properties that landlords won't want to miss out on.

Current Expenses

Current expenses are generally expenses required to operate and upkeep the rental property in good working condition. Current expenses are acceptable tax deductions for rental property and can be deducted in full in the year they were incurred provided that they were ordinary, necessary and reasonable.

Common types of current expenses for rental properties include: homeowners insurance, utilities, mortgage interest, property tax, legal fees, accounting fees, advertising, office expenses, management fees, commissions, cleaning, gardening, HOA fees, pest control, pool maintenance, janitorial expenses and mortgage insurance premiums. Travel expenses to visit your property including airfare, lodging, taxi and up to 50% of all your meals while traveling can also be claimed as rental property deductions.

Capital Expenditures

Capital expenditures include any items that increase the value of the rental property or extend its life. Capital expenditures cannot be claimed in full in the year they were incurred but rather they must be amortized or depreciated. In other words, we can only claim a portion of the expense in any given year.

For example, the purchase price of the house can be depreciated over 27.5 years if a residential property or 39 years if a commercial property (office building, warehouse, etc.). Any other improvements to the rental property (room additions, kitchen remodel, etc.) can be depreciated over 5 to 39 years depending on type of improvement. A good tax professional can help you with segmenting the capital expenditures so on average you will be able to claim these rental property deductions faster than the typical 27.5 years, allowing you to cut your tax liability and build your wealth faster.

Given all the deductions stated, many landlords can actually show a “paper loss” on their tax returns. These rental losses can offset your other sources of income such as wages. The IRS allows up to $25,000 of rental losses to be deducted against your income. You will need to consult with your real estate tax specialist on all the ins and outs of passive activity rules to make sure of your eligibility.

In closing, being a landlord allows you to build wealth while enjoying favorable tax deductions for rental property that minimize and reduce your overall tax liability.

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