Do you rent out property? Keep in mind that there are rental expenses that you can deduct from your tax return. Knowing the basics of real estate deductions can help you make the most of your rental income.
The basics
You may deduct ordinary and necessary expenses related to the management, maintenance, and conservation of your rental property.
These include:
Mortgage interest
Property tax
Operating expenses
Depreciation
Repairs
Maintenance
Utilities
Insurance
Advertising costs
You can deduct the costs of materials and supplies needed to keep the rental property in good operating condition, as well as tenant-paid expenses that qualify as rental expenses.
The amount commensurate to services and the rental property’s fair market value (FMV) – which can only be determined by an independent appraisal and pertains to the amount that a willing, knowledgeable, and unpressured buyer would pay for the home – may also be deducted as rental expense.
Properties that qualify for real estate deductions include:
Primary homes
Vacation homes
Land
Foreign property
The following expenses do not qualify for deductions:
Property you don’t have ownership of
Rental or business property, which should be claimed as an expense and not a deduction
Local improvements for sidewalks or streets
Expenses that aren’t directly related to the property’s value, such as trash collection and library taxes
The difference between a passive investor and a real estate professional
The kind of tax breaks you’re entitled to will depend on your status as a passive investor and a real estate professional.
According to the Internal Revenue Service (IRS), a real estate professional is someone who spends at least half of their total working time in a rental business, which also includes property construction, development, and acquisition and management. They should spend 750 hours or more working on rental properties each year.
If you qualify as a real estate professional, your losses are fully deductible from all income, whether passive and non-passive.
If you don’t spend as much time in the rental business, your losses are considered passive and will only be deductible for up to $25,000 of your rental income. Losses exceeding $25,000, however, can be carried into the next year.
Tips for real estate deductions
Claim any deductions for the year in which you made payments. For instance, if you settled property tax for 2017 in December 2016, make the claim in your 2016 return.
If you paid with your mortgage, deductions can only be made once the lender has settled it for you.
Co-op members can only claim their share of the amount shouldered by the corporation.
Multiple owners should split deductions based on the amount each individual paid.
School taxes can only be deductible if they’re based on your property’s assessed value.
Keep records. Though the IRS gives you a lot of flexibility when it comes to the items you may deduct, you must be prepared to back up your claims with sufficient documentation.
Make a breakdown of rental expenses. Be sure to separate expenses incurred for capital improvements from those that have incurred for maintenance and repairs.
With these tips in mind, you’ll be able to use real estate deductions to your advantage.