Running and managing rental properties is one way to build wealth. As a real estate investor, you take pride in owning a rental property due to monetary and security benefits. However, every year, like millions of other landlords, you have to pay more taxes on your rental property than the income you generate.
Have you ever wondered why? It’s because they don’t tell you about the tax deductions that are available to you as an owner of a rental property. There are several tax deductions that you can benefit from.
The key to availing tax deductions is to understand property tax to maximize your profits. Read this guide to master the art of tax deductions.
1. Rental Property Interest
Interest in the biggest deductible expense that you can avail. Two examples of deductible expenses are mortgage payments on loans used to improve or acquire a rental property. Interest on credit cards for services or goods used in rental activities is also deductible. Although the 2018 Tax Cuts and Jobs Act limits interest deductions on over $25 million earnings, such landlords can still avoid the limit through 30-year depreciation instead of 27.5 years.
Assuming you have taken out a loan for rental repairs, all the accrued interests are deductible on the taxes during that year. Make sure you learn about what qualifies as repairs according to Internal Revenue Service.
2. Rental Property Depreciation
Any tangible asset goes through wear and tear called deprecation. Depreciation accounts for the cost of purchase and improvements on rental property. Depreciation allows the money spent on a rental property to be tax-deductible.
Depreciation deductions are distributed over the useful life of a property instead of a single deduction in a year. It’s extremely important to understand depreciation rules when owning a property.
- You must be the owner of the property.
- You must use the rental property for income or business purposes.
- The rental property has a “useful life,” meaning it wears out, loses or decays its value over time due to natural causes.
- The rental property should last over a year.
If your rental property meets these requirements, but you cease using it for business in the same year, it will no longer qualify for depreciation. Remember that land is not depreciable because it doesn’t decay or wear out. Any accrued expense on changes to the land, such as clearing or landscaping, is part of the cost of land ownership.
3. Repair Costs
According to IRS, most repairs costs are deductible, but make sure these costs are necessary and ordinary. Necessary and ordinary expenses are costs incurred when owning a rental property. A property demands certain maintenance to keep the property valuable and livable. You should keep a record of money spent on repair and maintenance costs in a year. These expenses are deducted only during the year you make these repairs.
Following are the eligible tax-deductible expenses:
Patching and painting form the biggest chunk of maintenance costs for property owners. Luckily, all of these expenses are deductible. Supplies, materials or labor expenses should be deducted in the year they occur.
b. Service Cost
If you hire a cleaning service for exterior or interior cleaning between tenants or performing cleaning yourself, keep the record of receipts to make sure money doesn’t come out of your wallet.
For example, lawn mowing, labor cost for cleaning, sewer line blowing, trimming shrubberies, renting equipment or any such service are all considered repair and maintenance and are tax-deductible.
Other eligible deductible expenses include flooding, broken windows, appliance or plumbing issues, mouse traps and leaky pipes. In short, any cost that occurs to keep your rental property running will qualify as tax-deductible for that year.
Again, maintain the receipt record!
4. Property Management Service Expenses
It can be difficult to prove that you’re actively managing your property. Still, there are several ways you can avail of tax deductions on property management. For example, if you’re using property management service software or tenant screening systems, you can get tax deductions on property management expenses.
Assuming you establish a corporation or LLC to make tax deductions less messy and the corporation employs you as a property manager, you can get a tax deduction on your entire salary too.
5. Professional & Legal Services Fees
Real estate proprietary investors and investment businesses seek professional legal and accounting work assistance. These accrued expenses are tax deductibles. For a real estate investment business, tax deductions are made on the entire business. If, however, the expenses are related to a single property, then expenses are deductible for the actual property only.
6. Property Losses
If operating expenses are larger than the income generated from your rental property, they are considered rental losses. Each property is netted or combined to determine annual losses or income generated on the properties if you own multiple rental properties.
7. Landlord Insurance
You can deduct the insurance amount paid for premiums. As a rental property owner, you should also deduct workers’ compensation and health insurance costs if you have workers employed for your properties.
8. Marketing & Advertising
You may not always find tenants for your rental property. That’s when you need marketing services to advertise your rental property. The costs incurred due to marketing and lease-up commissions of property managers or real estate agents are also tax-deductible.
Affordable Property Management Services in Washington
Now that you know all the tricks of tax deductions, start with property management services to manage your property. At Sensible Home Management, we offer comprehensive real estate services in Federal Way, Pierce County and King County, WA.
Our services include advertising, property inspection, leasing services, tenant screening and 24/7 emergency services. With our property management services, you get the complete solution to your rental property management with no extra fees.
We don’t charge markups on maintenance work, and our property management service software streamlines all the processes to make sure both you and your tenant can access valuable information from the comfort of your desk. Contact us today for more information.