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9 Rental Property Tax Deductions: Guide

tax deduction papers placed on a black background with two pencils and a calculator

Rental properties are a great way to generate passive income. Having a rental business not only provides you with rental income but also allows you to access various tax benefits! In this article, we'll go over each of them and explain how they can help reduce your taxable income.

Keep in mind that tax laws change every year, so it's important to consult with a tax professional to see what rental property tax deductions are available to your property for the current year. Let's get started!

If you would like to start investing in rental properties, calculate your cash flow with our rental property calculator and get started on your journey to generate wealth today!

1# Mortgage Interest Deduction

One of the most common rental property tax deductions is the mortgage interest deduction. This deduction allows you to deduct the interest you paid on your rental property's mortgage from your taxable income.

For example, if you paid $12,000 in interest on your rental property's mortgage last year, you would be able to deduct that amount from your taxable income. This deduction can save you a significant amount of money on your taxes, so it's definitely worth taking advantage of if you're in the rental property business.

To claim the mortgage interest deduction, you'll need to itemize your deductions on your tax return. This means that you'll need to keep track of all the interest you paid on your rental property's mortgage throughout the year. You can do this by requesting a statement from your lender or by keeping track of your own records. Once you have all the information you need, you'll be able to claim the deduction on your tax return.

2# Property Tax Deductions

Property taxes are collected by almost every municipal and state government. They can range from a few hundred bucks to thousands of dollars based on your rental property's location. Check your escrow summary or speak with your tax professional to get the actual tax rate in your location. If your state has rental licensing, you can deduct any landlord or vacation rental license costs as well.

It's worth noting that the IRS caps the aggregate deduction for state and local income, sales, and property taxes at $10,000 ($5,000 for married individuals submitting separate forms). This implies that any local or state taxes paid beyond the cap are not deductible.

If you maintain short-term rentals, you may be subject to an occupancy tax imposed by your state, city, county, or town. You may deduct occupancy taxes in the same way that you can deduct sales taxes. Also, make sure to subtract sales tax on business-related purchases, salary and social security taxes for personnel, and service charges if you pay them.

3# Depreciation Deduction

Another rental property tax deduction is the depreciation deduction. This deduction allows you to deduct a portion of the cost of your rental property over time. This can be a great way to reduce your taxable income, especially if you've just purchased a new rental property.

There are also several deductions that are available for expenses that you incur in order to maintain your rental property. These expenses can include things like repairs, painting, and cleaning. If you incur these expenses, be sure to keep track of them so that you can deduct them from your taxable income.

4# Home Office Deduction

The expenditures of running a home office or renting commercial office space are both tax-deductible. Related expenditures like internet subscriptions, ink cartridges, and office amenities can also be deducted.

If you wish to take advantage of the home office deduction, keep in mind that the area must be used periodically and solely for business. It does not, however, have to be a full room. As long as you don't utilize that area for anything else, a section of your home qualifies.

5# Insurance Deduction

Insurance premiums for rental properties can be deducted as a rental property expenditure in the year they are paid. You can't use the technique of prepaying future years' premiums to boost your deductibles in the current year.

Deductibles apply to fire, burglary, flood, earthquake, and liability coverage. If you have a loss that isn't covered by your insurance, you may be entitled to deduct it as a casualty or theft loss.

6# Maintenance and Repairs Deduction

You can also deduct the cost of any maintenance or repairs that you have done on your rental property from your taxable income. This deduction can be a big help in reducing your tax bill each year, so it's definitely worth taking advantage of for rental property owners.

7# Legal and professional services deduction

It may be too much for you to handle every element of renting a house on your own. You can save time by relying on the knowledge of others. While certain costs, such as property management fees, will be costly upfront, they may be tax deductible afterward. Furthermore, doing things correctly the first time might save you money in the long term.

Deductible professional services are as follows:

  • Real estate Agents
  • Attorneys
  • Property Managers
  • Accountants

a man filling a tax form 

8# Utility Deductions

You can deduct the cost of paying utilities from your taxes if you're a landlord. This is because it's not unusual for tenants to take care of their own utility accounts and bills, but sometimes landlords pay in order to avoid disputes over who should cover these expenses- this might be seen as an accommodation (or "standard commercial rent") covered by law rather than charity!

#9 Transportation Expenses

Landlords frequently travel to rental homes that are within driving distance. You may also need to visit the bank, a hardware shop, or visit your agent, lawyer, and other important partners and suppliers.

If you have a home office and want to avoid local transportation expenses, keep an IRS-compliant record or use tools like MileIQ and Stessa to monitor all work miles. For 2022, the regular mileage charge is 58.5 cents per mile.

What is Nondeductible?

Some expenses that appear to be deductible aren't, so don't go by your gut when it comes to deducting rental property taxes. Here are other rental property expenditures you can't deduct, in addition to the limitations we mentioned earlier.

Upgrades and associated travel expenses may not be deductible. You must instead claim a refund of improvements via depreciation. Adding a room, rebuilding the ceiling, and insulating the roof are all examples of upgrades.

If your property remains unoccupied for a length of time, you cannot deduct the amount of rent you would have collected if it had been leased during that time.

You can't deduct the lost revenue if your renter doesn't pay the rent (unless you use accrual accounting rather than cash accounting). This law makes sense since you don't have to pay income taxes on rent you never get.

Driving from your house to your rental property isn't considered local travel. Instead it's a commuting expense if you don't have a home office.

Your paid points or origination costs on your mortgage. These must be deducted over the term of the loan. They cannot be deducted in the year they were paid.

You might want to consult a professional tax attorney about what can be deductible expenses regarding your rental property.

How to Claim Tax Deductions for Rental Properties

In general, you should use a Schedule E form to claim rental property tax deductions the year you pay the expenditures. If you keep thorough records of all revenue and expenses relating to the property as they occur, the procedure will be much easier to handle. You'll also have to produce documentation for every deduction you claim if you're ever inspected.

If you utilize the rental property as your principal residence at any point throughout the tax year, the filing procedure becomes more complex. The Schedule E form for each year specifies the number of days you can use your house yourself and the proportion of days the property can be leased out at fair market value before anything alters.

On Schedule E, you won't be able to deduct personal costs or losses in most circumstances. If you opt to categorize your deductions, you may be able to submit them using a Schedule A form.

Necessary Documentations

As a rental property owner, you may be subjected to inspection which is why it's important to keep a record of every deduction you are making. Here's a list of documents that you should keep track of in case anything legal happens.

  • Rental Property Tax Bills
  • Monthly Mortgage Statements,
  • Annual Mortgage Interest Statements (Form 1098)
  • Bank and credit card statements
  • Property renovation invoices
  • Professional Service Invoices
  • Rental property tax assessment reports
  • Insurance premiums
  • Original copies of the lease agreements
  • Detailed maintenance invoices and formal requests from the tenants

If you're ever inspected, having documentation that supports your deductions will help. You can store paper documents, electronic documents, or a combination of the two. If you go digital, make sure you backup your papers to the cloud so they don't end up on your computer.

For rental property owners, there are various possible tax deductions to benefit from. Rental properties are not only good for rental income but they also grant landlords with tax return opportunities.

If you don't want to keep track of every single step of the process you can always consult a professional tax attorney. Joining The Short Term Shop's group consultation can help you understand the process better and stay on top of your rental properties!

If you are looking to become a rental property owner and start generating rental income, contact us today. The Short Term Shop has great opportunities for both new and seasoned rental property owners.

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