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 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:
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 email@example.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.
Bill this is another outstanding article! What a great resource for anyone who owns rental property and wants to know the appropriate tax deductions.
I agree with you on the headache of owning rental properties. We have a property manager here in the office that I have manage my properties for me. The deductions are great, and with the current market, our county is seeing over a 90% vacancy rate. Right now is a great time to be a property manager as more people look to rent than buy.
Bill – you have a fine blog with a wealth of information from Short Sale to outstanding information about rental properties with regards to income, expenses, deprecation, etc.
I have managed 197 units in Texas, not the leasing part – we had a great leasing manager there. I handled the financial part, accounts receivable, accounts payable and so on – closing out the year with financial statements and preparing the information to the CPA. The most important thing is record keeping and of course a great CPA.
Jim ~ thanks for the compliments on rental property tax deductions!
Lisa ~ it is great to hear that rentals are doing so well in your area.
Petra ~ Thank you very much for your compliments on my blog. It sounds like you have quite a bit of inside knowledge of the financial aspects of owning a rental property and the associated tax deductions.
Great informaton! One thing that people also need to know is that if they sell, they will have to pay taxes on a portion of the depreciation they deduct. The gov’t gives with one hand and takes back with the other…
We own a duplex one side 550 occupant does the grass cutting The other side 600 utilities included d/t one shared utility..cost too much to rewire.
We do trimming of bushes, edging, clean gutters clean up after summer storms, winter storms limbs breaking ice storm how much can we pay ourselves for this work.
I have heard about 13.00 per hour.
One unit was also vacant for 6 months the 550 side.
I enjoyed your reader friendly article, and all the valuable advice. Happy New Year.
WE HAVE A CPA.
Excellent question Sue. I am not sure of the answer. My recommendation would be to speak to your accountant.
I have a rental property, but it has been relatively easy to manage. Once you get good tenants in there, it’s easy to manage, find a good home warranty company that will handle all the repairs, it’s a no brainer for having a passive income that will eventually be paid off. I have found it such a great testimonial for clients to know that I walk in their shoes as well. Great blog post, enjoyed reading it!!
Also, are you linked into Active Rain? That’s been a great resource too for referrals as well as jumping up your standings on the google searches.
If you ever have any referrals for the greater Phoenix, Arizona area, please keep me in my for both residential and commercial clients.
Best wishes to you for 2011! Martha
We manage a different “type” of rental property here in Breckenridge. Ours is a short term vacation rental business which comes with it’s own particular set of headaches. We have guests that stay for 3-7 days at a time in winter for ski vacations. In the summer we sometimes see 1-2 month stays by guests looking to beat the heat (highs in the 70s here in the summer!). But the deductions still outweigh any headaches we have from the rare complaining guest.
What about a rental property that is purchased for future appreciation, but currently is showing a large loss? Client purchased a condo at a bargain (she says) and is holding as an investment. But the rental income will not allow her to show a profit for years. Can appreciation be shown to pure profit intent? What if the IRS rules that the rental was not rented for profit and disallows the expenses more than rentals; no carryover allowed.
Is there a way to say that the interest is investment interest for the future appreciation and allow the rental to show a profit?
Hi George – I am not really that sure what exactly you are asking with your tax question. Not sure what you are talking about when you mention investment interest? I would consult with a tax professional to get your question answered.
We purchased a condo strictly for the purpose of a seasonal rental. However, before the condo was finished being built, the company went bankrupt and we are now out the $60K we invested in this “rental property”. Can we deduct the $60k as a rental income loss, since it was intended to be a rental? All other condos in the association that finished being built are now renting in a rental pool (except us).
Jan this is the kind of question you would want to ask a qualified tax professional. My guess is you can write of the loss but I am not exactly sure of the proper way to do it on your taxes.
Bill, I invested 80K cash about 7 years ago on a golf coarse frontage lot in a desert development that went broke. The builder made us investors, as the property has a 18 hole champ coarse that is owned by us and leased as well as a pro shop/restaurant. Can I write any of this off as a loss?
Jimmy this would be a question for a qualified tax professional. Sorry I don’t have the answer for you.
If I make $37,000 per year in rental income in Massachusetts, do you know what is the threshold for tax where if I have enough legitimate home repairs and costs deducted from this, I would not be required to pay tax in Boston?
Rick I am not a tax expert. I would check with a qualified professional as everyone’s tax circumstances can vary.
If i foreclose on my rental property, can the bank come after my primary residence?
They are handled by 2 different Banks. Rental is in Fall River, and primary is in Westport, MA
Hi Charlie – when you get foreclosed on the lender has a legal right to collect on that debt. Whether they can get at your primary residence is a question for an attorney. There are lots of factors that could play into that answer.
I had a rental property that I turned into my primary residence. The tenants moved out in June of last year and I spent 7 thousand in repairs as they trashed the place. Is the 7 thousand dollars I spent a tax deduction even though I turned it into my primary residence? Also, Can I still take a deduction for the house being a rental for 6 months out of the year before making it a primary residence?
How are travel expenses for closing on a real estate rental property purchase treated for tax purposes. Are they added to the basis of the property, or are they a current expense?
Great question! I am not sure of the answer. It could be neither! This is something you would want to ask a qualified tax professional.
Jerry – These are excellent questions. I would consult with a tax professional as I am not 100% sure of the answers.
Dear Mr. Gassett,
Much appreciated your informative article.
“quick ” question: re: Income Tax Return:
Are you able to submit invoices for work that you performed in your rental property? It would have been a $10,000.00 paint job for a complete three bedroom, kitchen, large living room, dining room had my brother hired a painter. As an owner/operator he did not go to his job and he painted this large apartment. This property is in Long Beach, NY.
Thank you, once again.
Renie it is an excellent question. I do not believe you can deduct for your own labor but this is something you would want to double check with a qualified tax professional.