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Tax Deductions for Individuals with Rental Properties

Owning rental properties can be a lucrative investment. Not only can it provide a steady stream of income, but it also offers a variety of tax benefits that can help reduce your tax liability. The U.S. tax code provides several tax deductions for individuals with rental properties, allowing property owners to offset their income and maximize their returns.

At V Tax Services, located in Littleton, Colorado, we specialize in helping individuals and businesses navigate the complexities of the tax system. In this blog, we’ll take a closer look at some of the most common tax deductions for rental property owners and how you can take advantage of them to reduce your taxable income.


Taxation of Passive income

Why Tax Deductions Matter for Rental Property Owners

Owning rental properties comes with a unique set of tax responsibilities. You must report all rental income on your tax return; however, the IRS allows you to deduct many expenses for managing and maintaining your rental property. These deductions can significantly reduce your taxable income, lowering your overall tax liability.

Whether you own a single rental property or a portfolio of properties, understanding which expenses are deductible can help you save money and improve your returns on investment.

Common Tax Deductions for Rental Property Owners

Below are some of the most common tax deductions available to individuals who own rental properties:

1. Mortgage Interest

One of the largest tax deductions available to rental property owners is the mortgage interest deduction. If you have a mortgage on your rental property, you can deduct the interest paid on the loan. This can be a significant deduction, especially in the early years of the mortgage when most of your payments go toward interest rather than principal.

For example, if you paid $10,000 in mortgage interest this year, you can deduct that amount from your rental income. This deduction can help reduce your taxable rental income, and in some cases, it can even push you into a lower tax bracket.

2. Property Taxes

Just like mortgage interest, property taxes paid on your rental property are also deductible. Property taxes can be a significant expense, especially in areas with high property values. Fortunately, the IRS allows you to deduct the full property taxes paid during the tax year.

For instance, if your annual property tax bill is $5,000, you can deduct that amount from your rental income when filing your taxes.

3. Depreciation

Depreciation is a powerful tax deduction that allows rental property owners to deduct the cost of the property over time. The IRS considers rental properties to have a useful life of 27.5 years, and you can deduct a portion of the property’s value each year as depreciation.

For example, if you purchased a rental property for $275,000 (excluding land value), you could deduct $10,000 per year in depreciation over 27.5 years. Depreciation is a non-cash deduction, which means you don’t have to spend any money to take advantage of it. This deduction can significantly reduce your taxable rental income without affecting your cash flow.

4. Repairs and Maintenance

Unlike improvements (which are capitalized), repairs and maintenance are deductible in the year they are incurred. This includes any expenses related to fixing broken appliances, painting the property, repairing plumbing, or replacing broken windows.

For example, if you spent $2,000 on repairs to fix a leaking roof, you can deduct that amount from your tax return. Keeping good records of all repairs and maintenance expenses is essential, as these deductions can quickly add up over the year.

5. Insurance Premiums

Insurance premiums paid for your rental property are also tax-deductible. This includes premiums for homeowners insurance, fire insurance, flood insurance, and liability insurance. If you have a policy that covers both your rental property and your residence, you’ll need to allocate the portion of the premium that applies to the rental property.

For example, paying $1,200 per year in insurance premiums for your rental property can deduct that amount from your rental income when filing your taxes.

6. Professional Services

Any fees paid to professionals who help you manage your rental property are tax-deductible. This includes fees paid to property management companies, real estate attorneys, accountants, and tax professionals. If you hire a property manager to handle tenant relations, collect rent, and maintain the property, you can deduct the cost of their services.

For instance, if you paid a property manager $3,000 in management fees over the year, you can deduct that amount from your rental income. Similarly, if you hire a tax professional like V Tax Services to prepare your tax return, the cost of their services is also deductible.

7. Utilities

If you, as the landlord, pay any of the utilities for the rental property (such as water, electricity, gas, or trash collection), you can deduct these expenses from your rental income. However, you cannot deduct these expenses if your tenants pay for utilities directly.

For example, if you paid $1,500 in utilities for your rental property this year, you can deduct that amount.

8. Travel Expenses

You can deduct your travel expenses if you travel to and from your rental property for business purposes. This includes the cost of driving to the property for repairs, meeting with tenants, or conducting routine inspections. If you own rental properties in other states, you can also deduct the cost of airfare, hotels, and meals associated with managing the property.

For driving-related expenses, the IRS allows you to deduct either your actual vehicle expenses (such as gas and repairs) or the standard mileage rate, which is 56 cents per mile for the 2021 tax year. Keep detailed records of your mileage and travel expenses to claim this deduction.

9. Legal and Advertising Costs

These costs are tax-deductible if you incur legal fees related to your rental property, such as drafting leases, handling tenant disputes, or evicting tenants. Any fees paid for advertising your rental property, such as listing it on rental websites or placing ads in newspapers, are also deductible.

For example, if you paid $500 in legal fees to handle an eviction and spent $300 on advertising to find new tenants, you can deduct these expenses from your rental income.

10. Interest on Loans

In addition to mortgage interest, you can also deduct interest paid on other loans related to your rental property. This includes loans used to purchase equipment or make improvements to the property.

For example, if you took out a loan to purchase new appliances for your rental property and paid $500 in interest, you can deduct that.

11. Depreciation of Equipment and Improvements

If you purchase equipment for your rental property, such as appliances or furniture, or make improvements, these costs can be depreciated over time. Unlike repairs, which are deductible in the year they are incurred, improvements must be capitalized and depreciated over their useful life.

For example, if you install a new HVAC system that costs $5,000, you’ll need to depreciate that amount over the system’s useful life, typically 27.5 years for residential rental property improvements.


Taxation of Passive Income, Colorado

Passive Activity Loss Rules

While rental property owners can take advantage of many deductions, it’s essential to be aware of the passive activity loss rules. Under these rules, rental real estate is generally considered a passive activity, and you can only deduct passive losses against passive income. This means that if your deductions exceed your rental income, you may be unable to deduct the total amount of your losses.

However, there are exceptions to this rule. If you actively participate in the management of your rental property and your adjusted gross income (AGI) is below $100,000, you can deduct up to $25,000 in passive losses. The deduction is gradually phased out for AGIs between $100,000 and $150,000.

Additionally, if you qualify as a real estate professional, you may be able to deduct unlimited rental losses against your other income.

Conclusion

Owning rental properties can provide significant tax benefits, but it’s essential to understand which expenses are deductible and how to take advantage of these deductions. By working with a tax professional like V Tax Services, you can maximize your tax savings and comply with IRS regulations.

From mortgage interest and property taxes to depreciation and repairs, numerous deductions are available to rental property owners. By leveraging these deductions, you can reduce your taxable income and improve your overall return on investment.

If you own rental properties in the Greater Denver area and need help navigating the complexities of the tax code, contact V Tax Services today. Our team of experienced tax professionals is here to help you maximize your tax savings and achieve financial success.

For more information, visit our website at www.vtaxservices.com or call us to schedule a consultation with one of our tax experts. Let us help you take full advantage of the tax benefits available to rental property owners.

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