Real estate is an attractive investment for several reasons. One example is the tax deductions that investors can write off when it’s time to file their taxes, such as the cost of repairs, property depreciation, maintenance, and more. In general, nearly everything involved in running the residential rental property can be deducted from your taxes.
So, if you were Googling, “Can you deduct utility costs from your rental property’s taxes?”, the answer is yes. Water, gas, electricity, heating, air conditioning, and more are deductible, along with many other rental-related costs.
In this article, we’ll talk about the types of tax deductions you can expect to write off from your taxes. Don’t worry, you might think that reporting your taxes is taxing, but it’s not impossible – take it from our professional property management agents who’ve been doing this for years.
#1 Mortgage Interest
If you took out a mortgage to purchase your rental property, you’ll be glad to know that mortgage interest can be written off of your taxes. Keep in mind that this does not mean that you can deduct the entire amount – it only applies to the interest, otherwise, it’d be like you’re getting a house for free!
Your lender will provide you with Form 1098 which details how much you owe in terms of interest. If you haven’t hired an accountant, consider enlisting the services of a property management company with an in-house team of CPAs to help you out.
Aside from your mortgage, you can also deduct the credit card interest for purchases that went towards your rental property. For instance, if you’re paying monthly for an appliance that you purchased for your rental unit, you can deduct its corresponding interest, too.
Over time, your property will undergo wear and tear, causing it to depreciate. While the value of the land won’t depreciate, the structure of the house will. Fortunately, this depreciation is deductible from your taxes, and can significantly lower your expenses when it’s time to pay your taxes.
The math can be complicated since the Internal Revenue Service (IRS) says you should spread out the depreciation over 27.5 years, so you may want to consult an expert on property taxes such as a property management company. You can also deduct the depreciation on items you use to run your rental, such as your computer, car, and so on. As a rule of thumb, you can deduct the depreciation on things that add value to the rental property, but also lose value over time.
#3 Maintenance and Repairs
Another deduction you can write off from your taxes is your expenses for repairs and maintenance. These are the activities that you do to keep the property in rentable condition but do not add substantial value, unlike home improvements. Examples of tax deductibles are landscaping, plumbing, air conditioning, and heating, among others.
As a general rule, the repairs that can be deducted during a single tax season should not improve the home’s value. Those that add value (e.g. adding a bedroom, bathroom, etc.) are considered as improvements by the IRS, and therefore need to be depreciated.
Aside from the cost of repairs, you can also deduct the cost of labor if you hire a third-party contractor or South Florida property management company. If you decide to do the repairs yourself, you can also deduct the rental fees for the tools that you used.
#4 Professional Fees
Have you hired a lawyer to ensure that you’re following all of the relevant laws? Or should you hire a CPA to help you prepare your tax returns? Remember that you can deduct their exorbitant fees from your taxes.
If you’ve hired a property management company, you can also deduct their fees from your taxes, even if their role was limited to, for example, screening tenants. As long as you hired a professional service to help you run your rental, you have every right to write off their fees. With that said, you cannot deduct professional services that are unrelated to your rental property’s day-to-day operations, such as recovering repossessed property.
Before you get excited, this does not refer to personal travel expenses, but rental-related expenses. If you reside far from your rental property, you can deduct your transportation expenses from your taxes according to the IRS’s standard mileage rate. This, of course, applies only to transportation to and from your rental property, such as traveling to the property to conduct repairs, screen prospective tenants, and so on.
You may be able to deduct other costs you incurred as long as they’re reasonable. For instance, if you had to pay for lodging, you can deduct that cost per night as long as you didn’t abuse your privilege by staying at a five-star hotel. If you have to fly out to your investment property, you can deduct the airfare, too.
Your utility bills fall under your rental business’s operating expenses, therefore they can be deducted from your taxes. Examples of tax-deductible utility bills are water, heating, air conditioning, cable, and internet connection, among others. It’s worth mentioning that this applies only if you’re paying for your tenant’s utilities – if your tenant reimburses you down the road, you will have to claim that amount as part of your rental income.
Don’t Forget to Document Everything
One of the mistakes that first-time property investors make is failing to document everything related to managing their rental properties. It’s extremely important to maintain records of your expenses or you’ll have a hard time should you have to provide evidence to the IRS. It would be wise to hire a property management company to maintain your documents on your behalf. That way, you can easily refer to certain files when needed.
At Luxury Property Care, we serve a variety of investors with our world-class property management solutions. Not only do we oversee our clients’ rental properties, but we also stand by their side when tax time arrives. We have a team of in-house CPAs that are prepared to help you record your expenses and report your taxes. We’ll make sure that there aren’t any discrepancies, so you can rest assured knowing that you’re in good standing with the IRS.