Tax reforms enacted by Congress left deductions for rental property untouched, preserving the favorable tax treatment for investment real estate. The tax code permits most owners of residential rental properties to offset income by writing off numerous rental home expenses. And although finding tenants and fixing faucets can be a lot of work, one of the biggest rewards for being a landlord isn't the rent check, but rather the considerable tax deductions allowed for rental property. Make sure you get all you are allowed by being prepared for your annual tax appointment.
You may claim tax deductions for the year in which you pay for rental home expenses. Save all receipts and documentation for work performed at the property and give your CPA a detailed list. Some of the most common deductible expenses are advertising, cleaning, commissions paid to rental agents, homeowner association fees, insurance premiums, legal fees, utilities, mortgage interest and property taxes.
You can deduct expenses related to traveling locally to a rental home for such activities as showing the property, collecting rent or doing maintenance. If you must travel outside the local area you can write off the expenses if the purpose is to collect rent, or in the words of the IRS, “manage, conserve, or maintain” the property. If you mix business with pleasure during the trip, you can only deduct the portion of expenses that directly relate to rental activities, such as air fare to visit your condo in Aspen, not lift tickets.
The tax code allows you to write off repairs you make to keep your property in good working condition in the year that you pay for them, but the costs of improvements that add value or extend life must be depreciated over several years. A broken window is an immediate deduction, while replacing all the windows counts as an improvement by the IRS and must be depreciated. Carpeting and appliances in a rental home are usually depreciated over five years. Either way, Uncle Sam gives you a tax break for improving your property. And you can also depreciate the value of the entire rental property, minus the portion of the cost attributable to land, over 27.5 years. Depreciation calculations can be tricky and the exceptions many. Consult your tax advisor for advice on this and other tax deductions for your rental property. IRS publication 527, Residential Rental Property, has all the details.