Owning rental property is about more than collecting a rent check every month or responding to tenant maintenance requests. Each year, you’ll need to know how to report your rental activities to the IRS. There are several tax rules that take effect when investing in rental property.
Do you know how these five tax implications could affect your tax filing this year?
1. Rent Charged is Considered Income
The IRS views the money you receive for rent payments as income. This means you’ll have to pay income tax on this money. But this isn’t all. You’ll need to keep track of any money you receive. Other payments also count as income:
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Monthly rent
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Advanced payments
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Break lease fees
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Withheld security deposits
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Payments made for expenses the landlord would normally be responsible for (appliance repairs)
2. You Can Deduct Mortgage Interest
You may already know that you can deduct the amount you pay in mortgage interest for your home. But you can also do this for your rental property. This deduction can greatly reduce your income liability. The IRS allows this deduction because it wants to help property owners maintain ownership as the property increases in value.
Look beyond your mortgage, though. You may also be able to claim the interest paid on other loans. The loan or credit card needs to be directly related to your rental activities. A financial advisor can help you determine what qualifies.
3. You Can Deduct Repair Expenses
At some point, you’ll need to make repairs to your rental home. This is required to ensure your home remains marketable and inhabitable. The expenses related to your repair activities are deductible.
There is one catch. If you decide to do the labor yourself, you won’t be able to claim the value of your labor. If you pay a contractor to do the work, then you can deduct the full cost of the repair. This is when having a property manager can come in handy. They can make all of the arrangements for the repairs; all you have to do is claim the deduction.
4. Property Depreciation Deduction
Depreciation is the regular wear and tear that your rental property experiences through normal use. A tax accountant can help you determine the proper amount of depreciation for each year. You can take a deduction each year until the total amount deducted equals the amount you paid for the property.
If you’re like most landlords, you’ll end up with a net loss after deducting your property depreciation. The good news is that this isn’t an actual loss since depreciation isn’t a cash expense. You can put some of this loss to work on the rest of your taxes.
You can use up to $25,000 in losses against other income you’re reporting. There’s a limitation of $100,000 in modified adjusted gross income (MAGI) for both single and married filers. In simple terms, this means that if you have a net loss of $10,000 for your rental property, you can apply that to your $50,000 MAGI. This reduces your MAGI to $40,000.
5. Other Tax Write-Offs
You can deduct more than your mortgage, repair, and depreciation costs. Think of running your rental property like a business, so there are several expenses you can claim. One of the most important deductible expenses is a property manager.
This makes the decision to hire a property manager a wise one. Not only will they take the pressure off of your shoulders, but they’ll provide you with written records of everything that happens with your property. This makes managing your property and accurately reporting your taxes much easier.
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Advertising
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Travel Expenses
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Cleaning
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Legal fees
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Maintenance
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Management fees
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Liability insurance
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Supplies
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Utilities
Boost Your Rental Income Today
As you can see, owning rental property comes with a list of tax implications that can completely change your yearly tax liability. While you’re required to report your rental income, there are plenty of deductions to offset this extra income.
We can help you maximize your deductions. Our property managers keep detailed and accurate records. This makes navigating the many rental tax implications easier.
Contact our office today and let our team show you what your rental property is worth.
