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From repairs and maintenance to mortgage interest, running rental properties can come with many expenses. However, you can claim a wide array of tax deductions related both to the running of the property itself and even to running a business.
1. Rental expenses deductions
One of the most important aspects of owning rental real estate is the fact you can deduct certain expenses on your personal tax return, according to Paul T. Joseph, attorney, CPA and founder of Joseph & Joseph Tax & Payroll in Williamston, Michigan.
“Any expenses directly related to the care, maintenance, upkeep, replacement of personal property and repairs to the property can be deducted,” he says.
Tax deductions for rental property can be numerous: This can include furnace repairs, a new paint job in the home’s interior, lawn mowing services and more. Any maintenance cost can be deducted as well, including cleaning expenses such as move-out/move-in cleaning between tenants. You can also deduct ongoing expenses like homeowners insurance and property taxes. There are also the lesser thought of items to deduct, like mortgage interest, advertising, utilities and travel costs.
However, don’t confuse maintenance and upkeep with property improvements, which are handled a different way. As the IRS notes, you cannot deduct the cost of improvements. Instead, you can “recover some or all of your improvements” by using Form 4562 to report depreciation beginning in the first year your property is rented and beginning in any year you make subsequent improvements. However, “only a percentage of these expenses are deductible in the year they are incurred,” they note.
2. Qualified business income deductions
According to the IRS, owners of sole proprietorships, S corporations, partnerships and some trusts/estates might get to claim the qualified business income deduction. This is also called Section 199A.
Eligible taxpayers might be able to deduct up to 20 percent of their qualified business income, as well as 20 percent of qualified real estate investment trust dividends and qualified publicly traded partnership income. So depending on how you run your rental property as a business, you might qualify for this deduction.
3. Property depreciation tax deductions for rental property
Riley Adams, CPA, a senior financial analyst at Google and the owner of the website Young and the Invested, says you can also benefit from deducting depreciation of your property on your taxes. Depreciation allows landlords to write off part of the loss in value of the property’s structures due to age, wear and tear and basic deterioration. For residential property, depreciation is typically deducted over 27 1/2 years.
Adams also notes that a powerful shield against taxation for rental properties comes in the form of MACRS depreciation, or Modified Accelerated Cost Recovery System. This tax item allows for the acceleration of depreciation expense, thereby decreasing taxable income in the present while increasing it in the future, he says.
With MACRS depreciation, the rental property owner can realize a lower net present value in terms of tax burden because a dollar today is worth more than a dollar tomorrow.
A key point about rental depreciation is that it’s a great tax benefit while you’re renting, but when you sell the property, the depreciation gets treated as section 1231 income and is taxed, along with any associated capital gains. This can lead to shocking tax bills owed when you go to sell rental property.
4. Other expenses associated with running a business
You may also be able to find tax deductions for rental property related to running a business. For instance, if you use part of your home for your business, such as if you have a home office, you might be able to deduct a certain amount related to using your home for business purposes. However, the home office has to operate as regular and exclusive business use and the home office must be your principal place of business, according to the IRS.
Another area you might be able to deduct expenses is if you have employees or contractors. If you employ a property manager or you contract people to fix up the property, for instance, wages paid may be deductible.
In addition to other costs of running a business, you may also be able to deduct any legal or other professional fees you incur. For instance, if you have to pay a legal fee as part of setting up an organizational partnership, that could qualify as a professional expense as part of your business. You might also be able to deduct fees related to other professional expenses like those incurred by accountants, bookkeepers and tax preparers as part of direct and necessary operation of the business.
5. Rental property income loss deductions
In terms of rental property tax deductions, you get to take the cost of repairs, maintenance, taxes, insurance, depreciation and any other expenses that are associated with the property. However, under the current act, you are limited to deducting losses that exceed income by $25,000, says Joseph.
“So, in effect, if you had income of $20,000 and expenses of $50,000 you would only be able to deduct $25,000,” he says. From there, you may be forced to carry forward the additional $5,000 in expenses to future years or when the property is finally sold.
However, your ability to deduct losses even then is limited if your income is too high. According to the IRS, your ability to write off $25,000 in losses is cut by 50 percent if your modified adjusted gross income (MAGI) is over $100,000. Once your MAGI is over $150,000, you lose the ability to deduct rental losses altogether.