Renting out a home can be a bit intimidating, at first thought. The cost of home repairs and the gamble of finding tenants can be stressful, but the benefits of income and tax deductions can make it all worth it.
Many rental property expenses can be deducted to offset your rental income. Below is an overview of the rental property tax deductions you might be eligible for. For all specific details, the IRS Publication 527 has further information.
Tax Deductions for Landlords
There is a good amount of tax deductible expenses for landlords. Make sure you are saving ALL receipts and documentation. You should be able to claim the deductions for the year for the following rental property expenses:
- Rental agent commissions
- Association fees
- Insurance premiums
- Legal fees
- Mortgage interest
- Taxes, including property taxes
Other deductible expenses include fees charged by an accountant to prepare your schedule E. Also, please note it does not matter the location of your rental or whether it is a trailer,
Travel Expense Deductions
Renting out a property requires travel to and from the property for showings, collecting rent, or maintenance. For local travel, you can claim the standard mileage rate for gas as well as tolls and parking if you use your own car.
If you are traveling outside your local area to handle rental property manners, the expenses that directly relate to rental activities can be deducted as well.
Repairs and Improvement Deduction
It is important to know the difference between repairs and improvements when it comes to tax deductions on your rental property. The tax code lets you immediately write off repairs as you would other expenses while improvements must be depreciated over several years (more info on this below.)
The best way to differentiate the two is a repair counts as any fix to keep your property in working condition while an improvement adds value to a rental property or extends its “life”. Think: patching a roof leak vs. retiling the entire roof.
Depreciation refers to a property that has lost value over years due to wear, tear, environmental factors, and degeneration. In terms of improvements to a rental home, you can deduct a portion of the property’s lost value each year over a set number of years.
Depreciating the value of the rental home can begin as soon as it is put on the market for rent, with or without tenants. Generally, you depreciate the value of the home over 27.5 years. Once you recover the cost or you stop renting out the home, you will have to stop depreciating it.
Although a valuable tax benefit, calculating the depreciation can be tricky. IRS Publication 946 provides additional information. Also note: Form 4562 should be used come tax time and a tax adviser is highly suggested.
Profits and Losses on Rental Homes
Rent collected from your tenant counts as income. You deduct your rental home expenses (including depreciation) from that income to lower your tax bill. You can write off a net loss on a rental home as long as you meet income requirements, own at least 10% of the property, and actively participate in the rental of the home. Active participation in a rental includes placing ads, setting rents, or screening prospective tenants.
If your modified gross income is below $100,000 you can deduct up to $25,000 in rental losses. The deduction for losses gradually phases out between income of $100,000 and $150,000 so you may be able to carry forward excess losses to future years.
If you have a vacation home that is mostly for personal use but rented out up to 14 days in the year, you are exempt from taxes on the rental income. Although some expenses are deductible, the personal use of the house limits these deductions.