Tax Deductions For Rental Property

by Bill Gassett on December 29, 2010 · 26 comments

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Tax Deductions For Rental Property

Massachusetts Tax Deduction Rental Property

Given that fact that I am a Massachusetts Realtor, I often get asked if I have any rental property. It is a pretty logical question as I work in the field and would obviously have access to the information necessary to get a pretty good deal on a rental purchase.

Honestly I have never been interested in the headaches associated with a rental property. Everything from dead beat tenants not paying their rent to the thought of getting a call in the middle of the night from someone saying they have no heat or the water tank burst. No thanks…not for me!

This is not to say that owning rental property is a bad thing. There are lots of folks who have made terrific money off of owning a rental property. I have many friends as was as clients who I have helped purchase rental property over the years.

One of the excellent benefits of owning rental property besides collecting a rental check every month are the tax deductions.

The tax deductions for a rental property are quite different than those of a primary residence. It is important to understand the differences in tax deduction for a rental property. The IRS allows property owners to offset income by writing off quite a few rental expenses. There is a publication put out by the IRS called IRS Publication 527 that gives a detailed description of what tax deductions are allowed.

Rental Expenses For Write Offs

When you are renting a home one of the most important things you can do financially is to keep meticulous notes on what you spend that is associated with the property. Make sure you keep all the receipts for items dealing with the rental. Some of the most common deductible expenses for a rental property are cleaning and general maintenance, fees and commissions paid to a Realtor or rental agent, any advertising expenditures, mortgage expenses such interest, taxes and insurance as well as well as utilities that you happen to pay for.

If it is a condo that you are renting another common deduction is the condo fees. When initially purchasing a rental home you can also deduct fees associated with obtaining a mortgage.

Rental repairs v.s rental improvements

The tax deductions on a rental property v.s a primary residence are quite different. In fact what you can deduct in a rental property is treated much differently. In a primary residence you can have tax breaks for home improvements but not for general repairs. In a rental home the IRS says you can deduct a repair (things that keep a home in operable condition) but that an improvement most be depreciated over several years.

According to the IRS an improvement increases the value of your home while a non-eligible repair just returns something back to it’s original condition. The IRS further states that a capital improvement has to last for more than one year, add value to your home or prolong it’s life. An example to distinguish the two would be fixing a window pain vs installing replacement windows.

Whenever you hire a contractor to perform services for your rental, you can deduct their wages as a rental business expense. This can be done whether the worker is an employee or an independent contractor.

Depreciating a rental property

Depreciation in a home is part of the value that is lost over time due to wear and tear. With improvements to a rental home you can deduct a portion of that value every year over a set number of years. Different components of a home have different time frames over which you can deduct as an expense.

Figuring out depreciation on a rental property is probably something best left to a qualified tax professional unless you have a background in accounting or are a math whiz. The basics of the tax code allow you to depreciate your entire property over 27.5 years. As a landlord you are able to depreciate the property until you  recover your costs or you stop renting the home which ever comes 1st.

Figuring rental home profit and loss

Figuring Rental Property profit and loss

Figuring your profit or loss on a rental property is pretty easy. It is as simple as looking at what you took in for rent and then deducting all your expenses. For example if your collecting rents over a year equal $24,000 and your expenses equal $6000 then you would have a gain of $18,000.

Showing a profit on a rental of course is what everyone strives for but what happens when you are faced with greater expenses that what you are taking in for rent?

The IRS allows you to write off a loss in a rental property as long as you hold a ten percent interest, meet certain income requirements and actively participate in renting the place. Participation can be something as simple as placing an advertisement.

If you are married and filing jointly and your adjusted gross income is less than $100,000, you can deduct up to $25,000 in rental loses. Your deduction for loses will gradually phase out between income of $100,000 t0 $150,000. There is the possibility however, that you can pass along loses to future years.

Miscellaneous rental deductions

One other expense worth noting is travel expenses going to your property. You are able to deduct for the millage going to the rental home. Valid reasons for traveling to the rental property include for collection of rent, showing the property or performing repairs/maintenance. If using your own car while traveling to the home you are able to claim the standard millage rate of 55 cents per mile as of the 2009 tax year.

As you can see there are some excellent tax deductions for owning rental property.

When it comes to taxes it always makes sense to consult with an accountant, as everyone’s tax situation can vary!

Other Real Estate articles worth a look:

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About the author: The above Real Estate information on tax deductions for rental property was provided by Bill Gassett, a Nationally recognized leader in his field. Bill can be reached via email at billgassett@remaxexec.com or by phone at 508-435-5356. Bill has helped people move in and out of many Metrowest towns for the last 24+ Years.

Thinking of selling your home? I have a passion for Real Estate and love to share my marketing expertise!

I service the following towns in Metrowest MA: Hopkinton, Milford, Southboro, Westboro, Ashland, Holliston, Medway, Franklin, Framingham, Grafton, Hopedale, Mendon, Upton, Northbridge, Shrewsbury, Northboro, Bellingham, Uxbridge, Worcester and Douglas.

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