As we prepare for the upcoming 9th Edition of IMN's Single Family Rental Investment Conference…
By Ramsey Kassih.
Owning rental properties is a great way to increase your monthly income and build your net worth. However, these monetary gains come with additional responsibilities such as maintaining your properties, tending to tenants, and added complexity when filing your taxes.
In this article, I will the outline 6 of the most popular and potentially money-saving tax deductions available to real estate rental property owners in the United States.
Interest is often a landlord’s largest deductible expense. A landlord is generally able to deduct all interest paid through their mortgage payments, along with fees associated with loans used to acquire or improve rental properties. This includes bridge loans, long-term financing, and even interest paid on credit cards used to repair or maintain properties.
2) Depreciation of Long-Term Assets
According to the US tax code, a portion of the cost of an asset that wears out or becomes obsolete over time can be deducted, especially a capital asset as it can be greatly depreciated. A capital asset is a property that is owned long-term and has a lifespan for more than one year. Capital assets include properties themselves, as well as appliances within—such as stoves, dish washers and refrigerators. Land does not become obsolete over time, so its value cannot be depreciated—meaning that only the cost of the structure itself can be depreciated.
To calculate how much can be deducted for depreciation, one first has to know what the tax assessed value of the property’s structure is, and what the IRS allows for each asset’s recovery period. Each year, the landlord is able to deduct the value of the property, divided by the asset’s designated recovery period, until the total cost has been fully deducted. Rental property structures have a recovery period over 27 years—whereas personal property, such as appliances, are usually five or seven years.
3) Insurance premiums
Landlords can deduct the insurance premiums they pay for on their rental properties. This includes fire, theft, flood, as well as landlord liability insurance.
All state, county, and city taxes are typically considered tax-deductible. Even permit fees and inspection fees that are paid to the city can be deducted.
The cost of repairs to rental property are fully deductible in the year in which they are incurred. Some examples of deductible repairs include painting, patching a roof, and replacing broken windows or doors. It is important that repairs are considered ordinary, necessary, and reasonable in amount. Essentially a repair is anything that brings the property back to the same condition as it was originally.
Money spent to substantially improve or remodel your property will not be considered a repair. For example, a room addition or complete kitchen remodel would be labeled as a capital expense. This is an important differentiation between repairs and capital expense, as repairs can be deducted during the year incurred, when capital expenses would be depreciated over multiple years.
6) Legal and Professional Services
Any expense or fee paid to attorneys, accountants, property managers, as well as any other professional can be deducted. These are all considered to be operating expenses.
While your taxes may be much more complicated than what is highlighted above, real estate investment properties generally provide more tax benefits than most other investments. The U.S. tax code has multiple rules that allow landlords additional tax deductions, which may ultimately reduce your tax liability. To earn these savings, it is crucial to know what you can expense and declare as tax deductions.
Simply put, landlords are able to deduct the expenses that are incurred in order to maintain a habitable property—along with anything needed to operate their rental business. The IRS uses the qualifier of “ordinary and necessary expenses” to determine what is deductible. Due to the loose definition, it encompasses a wide variety of expenses that can be incurred. It is important to be aware of what specific deductions are the most material to your business. Being proactive makes it easier to keep track of your expenses over the course of each tax year.
Do you need capital for your next investment property? Our loans have helped thousands of investors finance more than 40,000 units and close over $5 billion in loans. Contact us to explore your financing options. CoreVest is the leading lender to residential and multifamily real estate investors nationwide. We provide attractive long-term debt products for stabilized rental portfolios as well as credit lines for new acquisitions. For more information about how CoreVest can help you grow your rehab or rental business, please call Ramsey Kassih at 310.484.5798 or email firstname.lastname@example.org.
*Disclaimer: Neither I nor CoreVest provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.