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Tax Deductions for your Investment Property

Tax Deductions for your Investment Property

It’s tax time! Don’t miss out on these important potential deductions for investment properties.

In addition to the income you receive from your investment property and the capital appreciation of your investment, your property(ies) can also provide you sizable income tax deductions. In fact, rental properties offer more and larger deductions than most other investments. In spite of this, many of these deductions are often overlooked by landlords. The IRS allows for the deduction of expenses related to property upkeep and maintenance, conservation and management, and other expenses deemed necessary and associated with the property rental.

Below, we’ve provided a list of the most important deductions to landlords. Please make sure whoever prepares your tax return is aware of these opportunities. Any direct questions regarding these points should be directed to your CPA or tax attorney, as we simply providing general advice.

Interest

Landlords can deduct mortgage interest payments used to purchase and/or improve their property, credit card interest for goods or services used in a rental activity, and interest on personal loans for any item used in a rental activity. This is because the IRS allows for the deduction of interest on money borrowed for a business or investment activity, including being a landlord. This deduction does not include the portion of any payment made that is attributable to principal.

Depreciation

Property that wears out, decays, or becomes obsolete over time is said to depreciate over time. Because of this, the IRS allows the value of such property to be deducted over time, in what is referred to as a “depreciation deduction.” Rather than fully deducting the cost of real estate in the purchase year, landlords may deduct a portion of the cost of their property each year for a period of years. Because a building depreciates, but land does not, when you determine your depreciation deduction for your investment property, you cannot include the value of the land on which it sits- only the cost of the building itself can be depreciated. You can also depreciate structures that you own and use for your rental activity even though they are not used by your tenants- for example, a building you use as your rental office or a storage shed where you keep tools. The cost of landscaping can also be depreciated.

Rental buildings are depreciated over 27.5 years.

Repairs

The cost of ordinary, necessary, and reasonable repairs is fully deductible in the year in which they are incurred. Examples of repair expenses include repainting, fixing leaky pipes, replacing broken windows, and fixing other broken items on the premises. However, do not assume that anything you do on your property is a deductible expense. According to the IRS, a repair keeps your property in good condition, but an improvement adds value to your property. Repairs are deductible, improvements are not. The cost of improvements must be deducted by depreciating the expense over your property’s life expectancy. Examples of improvements include installing a new roof, constructing a deck, or adding an entirely new room to the house, such as a garage or sun room.

Local and Long Distance Travel

Landlords may claim a tax deduction for activities such as driving to their rental building, to hardware stores, or to meet with other local service providers, provided the travel is related to the income property. To calculate this deduction, you can either deduct your actual travel expenses (gas, upkeep, repairs, etc.) or go the simple route and use the standard mileage rate.

Landlords may also deduct expenses for overnight travel if related to rental activity. You can deduct your airfare, hotel bills, meals, and other expenses.

Payments for Services

Payments to employees and independent contractors for services performed on your rental property can be deducted as a rental business expense. This includes wages to employees such as a superintendent, as well as payments to plumbers, landscapers, attorneys, property management companies, and anyone else performing services related to your rental property.

Insurance

Premiums paid on almost all insurances for your rental property (fire, theft, flood, etc.) and landlord liability insurance can be deducted. If you have employees, the cost of their health and workers compensation insurances can also be deducted.

Casualty and Theft Losses

If your property is damaged or destroyed, you may be able to deduct all or part of the loss. The amount of your deduction depends on how much of your property was destroyed and whether the loss was covered by insurance.

Home Office

If minimal requirements are met, landlords may deduct expenses from their home office, workshop, storage space, and any other portion of their home used for their rental business.

This is not a comprehensive list of deductions available to owners of investment property, just the most common and most important ones. Consult our sources, or even better, a qualified CPA for a more detailed and thorough analysis of what is available to you and what is best for you in your specific situation. Good luck, and happy filing!

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