Tax Benefits of Owning Rental Real Estate Property
Although all income received must be reported to the IRS, there are a number of rental expenses that you can deduct on your tax return.
Here are some of the main rental real estate tax deductions:
- Mortgage Interest: Mortgage interest is often the single biggest deductible expense.
- Property tax
- Management fees/operating expenses/employees/contractors
- Repairs: This deduction is available for any repairs on your property that are not “improvements”. Things like painting, repairing gutters, fixing leaks and broken windows are all deductible repairs.
- Depreciation: This is a bit of a magical deduction. It allows you to deduct the actual cost of your property over time. The tax system views your property as a business asset. It assumes that this asset has a finite “life” and therefore allows you to write off the “loss” over time. Ironically, this asset is usually an APPRECIATING, income-generating asset, as opposed to a value-losing commodity.
You can deduct most ordinary and necessary expenses for your real estate property. In some cases, this may include local or long-distance travel, home office, casualty and theft, and professional and legal expenses.
Another tax benefit of investing in rental property is that the income you receive is not taxed as “earned income”. This means you don’t have to pay the usual taxes that fund Social Security and Medicare.
Lastly, you can potentially do a refinance, or second mortgage on your property without having to pay taxes on the money that you take out. For example, if you pay down $100,000 of the mortgage on your rental property, you could do a cash out refinance on the property and receive a percentage of that $100,000 to reinvest.
It is critical that you maintain good documentation for all of the activities listed above. Owning rental real estate can be one of the best investments you can make, but it must be treated like a business. Keep your receipts, canceled checks, bills, tax forms etc. in a safe place so you can submit accurate information and provide proof if you are ever audited.
If you have a property management company, they can take care of a lot of these details for you. To find out more email us at firstname.lastname@example.org.