Category Archives: Rental Property

If I Own Rental Property, What Deductions are Available to Me?

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As a rental property owner, your real estate actually gets more deduction benefits for tax purposes than nearly any other investment, but it will become meaningless if you do not make full use of what’s available to you.  There are not too many people who make an investment in rental property to take a loss, and taking full advantage of available the deductions can actually make a difference in you making a profit.

There are ordinary, reasonable and necessary expenses to manage, maintain and conserve a rental property and these expenses are tax deductible.  Owners or rental properties can deduct:  Newspaper advertising and sign costs, supplies for cleaning, real estate taxes, interests such as the mortgage paid on the property, flood, fire, liability or some other type of hazard insurance, payments for lawn maintenance, control of pests and trash collection, maintenance on the rental property, costs for new locks and keys, any commissions paid for finding new tenants, transportation to and from the rental property in order to manage or maintain it and rent collection (in case you use a personal vehicle, do keep track of all expenses and mileage).  You can also make deductions for property (excluding land), appliance, furnishing and home improvement depreciations.   If you have incurred court costs in trying to evict tenants, you may claim a deduction, but you cannot deduct any loss of rental income due to vacancy.

In any event, there is quite a list of reasonable deductions that you can make.  When it is all added up, you can end up with quite a different tax return than if you were to ignore possible deductions.  You should know the impact on your personal tax return if you are the owner of rental property.  You must report rental income on your income tax return and you can deduct the associated expenses delineated above from the income you earn through your rentals.  The above mentioned list is by no means definitive or exhaustive.

You can make deductions for employees or contractors when you hire anyone who is to perform a service involving your rental property.  For example, you can deduct wages as an expense for your rental business.  In addition, you can deduct long-distance travel, not only local travel.  If you have to make an overnight trip as part of your rental business, airfare, lodging, meals and other expenses are deductible.  However, you must keep immaculate records regarding your overnight travel deductions because the IRS looks very closely at these deductions.  You do not want to claim an overnight travel deduction without all the relevant paperwork to prove that your trip was related to your rental business.

There are also theft losses and casualty deductions.  Sudden events such as fires or floods can get you a deduction if your rental property is damaged or destroyed.  The amount of your deduction will depend on the amount of property destroyed and if it was insured.  Talk a competent accountant and find out what deductions are actually available to you and you may get a welcome surprise when tax time comes around.  And please make sure that you have all the relevant documentation in case the IRS decides to take a look at your rental business.

What is Rental Property Depreciation and Why it is Vital to You

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Rental property depreciation is a highly important concept for those who own or manage rental properties. Understanding how to calculate it is crucial for maximising your tax deductions and slashing your overall real estate taxes.

So what exactly is rental property depreciation? In simple terms, it’s the decrease in value of property over time as the building structure begins to wear and tear with age.

Depreciation can only be used for tax purposes on rental properties; you cannot claim depreciation for the home that you live in. It’s also important to note that rental property depreciation only applies to the building itself, and not the land upon which it is situated.

How to Calculate Depreciation for Non-Residential Rental Properties

There are a few different methods for making this calculation, however the most common and straightforward method is the so-called “straight line” depreciation method. Using this formula, annual depreciation is calculated by taking the purchase price of the building minus land value, and dividing it by its useful life span.

When it comes to the useful life span of the structure, you’ll need to refer to tax rules and local regulations. Laws vary, but generally you can find a fixed number based on the type and age of the structure, or a formula to calculate the building’s life span.

As an example, say you purchase a property for $150,000 with a land value of $50,000, and the property has a useful life span of thirty years, according to local laws. Annual depreciation is as follows:

150,000 – 50,000/30 = 3,333.33

Rental Property: Taxes on Selling Home

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If you are a homeowner, you will be entitled to tax breaks when you sell your home. It is possible to profit up to $250,000 if you file your taxes singly. If you file jointly, you could get $500,000. To make things even nicer, you will owe nothing to the IRS. There are a few caveats that are involved. You must have been the owner of the property and must have used that same property as your primary residence for at least 2 of the 5 years preceding the sale of the home. While this seems fair, what happened if you sold your home after only owning it for two years? In 2002, the IRS released new regulations that changed the original rules.

If you are in the situation of owning and residing in the home for less than 2 years, you can avoid the tax by claiming a reduced gain exclusion. This is fairly easy to qualify for. If you do qualify, the amount will most likely be large enough to protect the entire gain, even though the sale was made prematurely. If you are eligible, the amount would equal the $250,000 or $500,000 times a fraction. The numerator of the fraction would be the period of time that you owned and used the home and the denominator would be the two years that is required. For example, if you and your spouse owned and resided in your home for 22 months, the reduced exclusion would be $500,000 multiplied by 22 months over 24 months, which would equal $458,333. The reduced exclusion applies when the premature sale is a result of a change in employment, health issues or unforeseen circumstances.