anytime you fix a broken toilet or repaint a room- that can be deducted. Any repair that is necessary in order to keep the property functioning can be deducted. Any repair that isn't necessary for the property to function can be considered an improvement and therefore not deducted the year you have it done. It would instead be added to the base cost and depreciated out over time.
Anytime you drive to your rental to collect rent or perform a repair or anything of the like, you can deduct the cost of travel. There are two ways you can do this. First, you can deduct the actual expenses (gas, upkeep, repairs). Or secondly you can use the standard mileage rate. Talk to your accountant about which one is best for you.
This would include contractors, property managers, or anyone you pay to perform a service related to your rental.
The premium you pay for property insurance is considered a cost of doing business and is therefore considered a rental property tax deduction.
If you use your office at home for work on your rental property, there are certain ways you can deduct it. Check with your accountant on how.
If you use your cell phone to conduct work related to your properties or if you use your computer to keep records or do your bookkeeping for your rentals then those items can typically be deducted to a certain amount.
I saved this one for last because it is my favorite... If you sell a property and make a profit, you can defer the taxes as long as you re-invest in another property within so many days. You cannot do that with hardly anything else. For example, if you sell a stock and re-invest you still have to pay the capital gains tax on your profit. But with you real estate you can avoid the tax by re-investing. 1031 deferred tax exchanges are great if you want to re-invest. Note though that this isn't a way to get out of taxes it is instead a way to defer or put off paying taxes. 1031 tax exchange rules provide another one of my favorite qualities about real estate investing. It is one of those qualities that I think makes real estate investing better than most investment vehicles.
Section 1031 of the Internal Revenue Code provides that no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business, or for investment. A tax-deferred exchange is a method by which a property owner trades one or more relinquished properties for one or more replacement properties of "like-kind", while deferring the payment of federal income taxes and some state taxes on the transaction.
So if you bought a house, sold it and re-invested the money in another house, you would not have to pay the capital gains from the first house. If you then sold the second house and did not re-invest the money you would then have to pay the gain from the first house and any gain on the second house as well.
The reason the IRS allows 1031 tax exchanges is because when you re-invest the money into another property, your gain is on paper and not in a way that pays for the taxes. In other words you have a "paper" profit and not the cash in hand to pay taxes. So they allow you to put off paying the tax due until you do have the cash in hand. I love this feature and I believe it is really smart for the IRS to allow this.
You own a duplex that is valued at $250,000. You could put it on a straight 27.5 year depreciation schedule or you could segregate your shorter lived assets. If you choose to segregate and do segmented depreciation, you could depreciate $190,000 over 27.5 years and depreciate $40,000 over 5 years, and $20,000 over 15 years (for example). 5 year assets are typically things such as carpets, appliances, drapes, etc. 15 year assets are things such as fences, driveways, patios, etc. Which method is better - segmented or straight line? Let's take a look
You might have figured out though that the $40,000 in 5 year assets will be phased out after 5 years and the $20,000 in 15 year assets will phase out in 15 years. Yes, that is true, but the reality is that you will be replacing those assets anyway which starts the cycle over again. You will more than likely have to replace the carpets after 5 years in a rental. So in most situations, it is far worth it to do segment your depreciation.
Before we begin to talk about rental property tax deductions, you need to know what type of investor you are: passive or professional. If you are passive, then you can only deduct up to $25,000 against your income. If you are professional you can fully deduct your losses. It's 750 hours per year spent on your rentals to be considered professional. Talk to your tax professional about carrying over losses over $25,000 to next year if you are passive. Passive Investors report their rental Income & losses on schedule E, while professional Investors use schedule C or form 1120, or 1120S. These are the most common deductions:
If you have a loan for a property, you can deduct the mortgage interest as a business expense. If you have a line of credit, credit card, or something of the sort that you have used for services or things related to your rental then the interest on that is also a great rental property tax deduction.
Similar to your own home, property taxes you pay for your rental property is fully deductible.
Dues that are paid by the landlord are deductible as rental expense.
This is the beautiful thing about rental real estate... Your property goes up in value every year while on taxes it shows it going down. How wonderful is that!!! You see, when you purchase rental property you cannot deduct the price in the year in which you purchased it. But you can deduct a portion of the cost over several years (typically 27.5). Isn't that great! I love depreciation! Especially when in reality my property is appreciating and not really depreciating. I gotta hand it to Uncle Sam, that is nice.
If you thought regular straight line depreciation was great, listen to this. In the last few years the government has decided that while the life of real estate should typically be depreciated over 27.5 years, they realize that a lot of assets on the property are not going to last anywhere near 27.5 years. So they allow you to depreciate them quicker. Some people also call this cost segregation. It works like this: You buy a $200,000 duplex. You separate the non-structural elements such as carpet, appliances, wall coverings, etc and determine that $30,000 worth of items on your property are shorter lived items that count towards rapid depreciation. The remaining $170,000 will be depreciated over 27.5 years. Basically you get more depreciation expense each year and that helps you keep more of your profit. Check with your accountant about doing a cost segregation analysis. To understand the value and beauty of it, let's take a look at what depreciation is.
In accounting, you can write off a certain amount of depreciation as a cost or loss. You see, the IRS looks at your assets as "wearing out" and becoming less valuable over time. For example, if you own a freight company you can depreciate your trucks because they are wearing out and becoming less valuable. It may be a non-cash expense year to year, but someday you will have to replace those trucks.
As we look at our rental property tax deductions, segmented depreciation or cost segregation as some accountants call it can work greatly in our favor.You see, the beauty of segmented depreciation of rental property when it comes to real estate investing is that more than likely our properties are actually going up in value
For years real estate investors put their properties on a 27.5 straight-line depreciation schedule. But in reality you may have some assets attached to that property that will not last anywhere near 27.5 years. Instead, you can depreciate them sooner such as 5 or 15 years. Here's an example: