An Accountant’s 7 Tax Deductions for Rental Property:

1. Mortgage Interest Deduction

This is one of our favorite tax-write offs for real estate. The mortgage interest deduction essentially allows you to reduce your taxable income by the amount of money you’ve paid in mortgage interest during the year.

What does that mean?

Let’s look at it in practical terms.

Let’s say you got an $500,000 mortgage to buy a house in 2019, and you’ve paid $20,000 in interest on that loan within the past year. The Mortgage Interest Deduction allows you to deduct the entire $20,000 in mortgage interest against taxable rental income on your next return.

We told you it was great.

Note: The 2017 Tax Cuts and Jobs Act limited the deduction to the interest on the first $750,000 of a mortgage, so if your mortgage is higher than this, your deduction will be slightly lower. However, this limitation doesn’t apply to rental real estate. You can claim 100% of your mortgage interest on your real estate investment.

There are a few nuances to this deduction – such as what qualifies as mortgage interest – so we recommend speaking with your real estate accountant for the finer details.

2. Depreciation

Depreciating assets is a complex subject that takes most people back to an accounting class they’d rather not revisit.

We get it. That’s what you hire an accountant for.

However, depreciation is an important topic to grasp when it comes to paying taxes as it can go a long way in reducing your tax bill.

In short, depreciation is the process used to deduct the costs of buying and improving a rental property.  So, before you can pay off your loan, the IRS allows you to deduct the cost of your investment over the useful life of the property.  That’s why everyone LOVES real estate.  Depreciation is one of the few expenses for which there is no outgoing cash flow.

The depreciation may be recaptured at the time of sale. Consider 1031 exchange to avoid the recapture.

Let’s take an example:

This year, it’s time to renovate the kitchen in your rental property and it’s going to cost $10,000 out of pocket.

For example’s sake, let’s say this improvement will have a lifespan of 10 years.

Note: Depreciation rules vary depending on the asset, and generally average around 27.5 years for residential property and 39 year for commercial property.

In our example, it means that each year for the next 10 years, you can deduct $1,000 from your tax bill.

Makes sense?

Essentially, the IRS lets you deduct the depreciation of your asset while it’s most likely appreciating in value. 

We told you the tax code was written by landlords!

According to the IRS, depreciation starts as soon as you place the property in service or when it’s ready and available to use as a rental.

This means as soon as you have it ready for rent – i.e. you begin to advertise online or list it in the local papers – you can start to depreciate the house. You don’t need to wait until it’s occupied.

We recommend hiring a real estate accountant to do the actual depreciation calculations for you, as this isn’t something we can explain in a 1000-word blog post.

Just know that it’s there, and you should take full advantage of it as a real estate investor.

3. Property Taxes

Moving onto property taxes. This is another one of our favorite tax deductions for real estate properties.

While just the thought of property taxes is enough for us to let out an eye roll, they aren’t so bad when it comes to paying taxes as an investor.

That’s because you can choose to write property taxes off of your personal income or rental income.

As of today’s date, you can deduct up to $10,000 of property taxes against personal income per year, or $5,000 if married filing separately.

If offsetting against your rental income, there is no limit. Meaning you can deduct 100% of your property taxes against your rental income each year.

If you pay $5,000 in property taxes on your rental property, you can reduce your rental income by $5,000 at the end of the year.

The trick to this deduction is simply remembering to do it. It’s one that many investors forget to claim.

4. Maintenance & Repairs

Let’s face it: most rental properties you own go through some sort of repair or renovation.

If you’re doing the construction on your properties, the repairs are deductible on your taxes in the year you did the repair.

If you have to replace a window or repair a roof on your rental property in 2021, you get to write off that expense at the end of 2021.

Tip: It’s important to understand the difference between improvement vs. repairs. 

An example of improvement is replacing the entire roof or adding a deck. 

Improvement can generally be depreciated over its lifespan.

Still, some improvements are eligible for section 179 expensing after the passage of the CARES Act.

Brilliant!

All maintenance and repair of a property help you offset the tax you pay on that property because you’re improving the asset and neighborhood around you.

5. Travel

Many real estate investors will fly into their rental markets or drive to visit their rental properties quite regularly.

Renting a car, mileage, flights – these all qualify as a tax deduction.

When running a real estate LLC or S-corporation business, you can even claim part of the vehicle you own to drive back and forth between properties as a business expense.

However, deducting taxes for mileage or travel isn’t as straightforward as home repairs, so this is an area we recommend seeking out your real estate accountant to help.

Just remember, it’s incredibly important to keep track of the mileage, rental car receipts, flight receipts, etc. when traveling to and from your rental properties for business throughout the year.

They’ll come in handy come tax time.

6. Home Office

Coming off of 2020, the home office deduction is going to be a popular tax deduction for all business owners, not just real estate investors.

However, it’s especially pertinent to landlords, as most real estate investors work from home in some capacity.

You’ll want to check with your real estate accountant to find out exactly what qualifies as a home office. Typically, you need to have a door on the room and it should be used solely as an office.

No, working from bed does not count.

If you have a designated room to work on your rental properties, manage spreadsheets, and work on rental related income, then chances are you can deduct a portion of home office expenses (phone, internet, utilities) on your taxes.

Last but not least, employees and contractors are a tax deductible expense as a real estate investor.

If you work with contractors to build a new roof or hire a repairman to fix your broken windows, these wages are considered deductible business expenses.

Remember, the tax code was written for entrepreneurs. By hiring people to work, you’re essentially helping the broader economy, and in turn, will be rewarded.

As a rental property owner, don’t forget to cross this one off.

That wraps up our top 7 tax deductions for rental properties. We told you it’s a unique investment! 

Almost every member of Congress owns real estate. Why? They wrote the laws! And the laws say that you pay very little in tax when you own property. 

Take advantage of the tax code the way it was written. 

And as always, make sure you use an accountant who knows real estate. 

It takes a seasoned real estate accountant to know the ins and outs of the comprehensive tax laws for investors. 

If you have a question we didn’t answer or a tax deduction you’re unsure about, feel free to reach out to us here at Basta & Company. Simply send us a message with your question or book some time in my calendar. We’re always here to help. 

Until next time.