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Rental Property Tax Deductions

By Tabitha Naylor

Owning a rental property can benefit you when it comes to tax time. There are more deductions and tax strategies available for rental properties than most other types of investments. Unfortunately, many people fail to take advantage of all the allowances and deductions available to them as a rental property owner.

The first step to making sure you can reap the most benefit out of your rental property at tax time is to keep detailed records of all rental-related activities. It is especially important to keep all receipts and invoices. The second step is to make sure your property qualifies as a rental property by renting it out for more than 14 days a year, and using the property for personal use no more than 14 days, or 10% of the total rental days, whichever number is greater. It is best to treat your rental as a business. Use a separate credit card and bank accounts for the property or properties you own.

Mortgage Interest and Operating Expenses

Routine expenses to maintain a property in good condition can be deducted. Again, you need accurate records and accounting of these expenses. You can claim deductions for financing the rental property including mortgage interest and private mortgage insurance. You can also deduct interest on loans for improvements and the interest on credit cards you use as part of rental activity.

Other allowable deductions include local property taxes, insurance, property management fees, advertising, and utilities as long as the tenants or renters do not pay them. You can also take deductions for HOA dues, landscaping, and garbage among others. Any deduction you take should meet what the IRS defines as ordinary and necessary. Second homes can't be written off.

Depreciation

Depreciation is one of the all time best tax tools for a landlord because it enables you to write off the biggest expense, namely, the purchase price of the rental property (except for the land). The IRS refers to this as the "cost basis." Depreciation is reduces the basis for calculating gains or losses when you decide to sell or exchange the property.

Depreciation is completed over a long period of time. When you depreciate a building and its contents as a whole, it is done over a period of 27 1/2 years for a residential property and 39 years for a commercial property.

There is a way to speed up the depreciation by segregating costs. Components and improvements made to a property can be depreciated separately with different timelines. For example, furniture and appliances are depreciated over a period of five years.

Improvements and repairs are also included in the cost basis for depreciation even though the cost of most repairs is deducted in the year the repair was made.

Travel Expenses

Landlords can deduct travel expenses associated with their rental properties whether they drive across town or fly across the country. For local travel you can use the standard mileage rate or deduct actual expenses for gas, upkeep, and repairs as long as you keep all your receipts and accurate records. Any toll or parking fees are also deductible. For overnight travel you can deduct airfare and hotel bills as well as part of your meals and other general expenses. The IRS auditors often scrutinize these types of expenses carefully so make sure everything is properly documented and you have all of your receipts in order.

Home Office

If you conduct rental business out of your home, you may be able to deduct a certain amount of your home expenses including a portion of the utilities, home owner's insurance and interest on your home mortgage. This is another area auditors heavily scrutinize. In order to qualify for these deductions, the office, or work space must be the principal place of business, that place where most transaction take place like meeting prospective tenants. It can be inside a house or in a detached structure on the same property, or an apartment you rent, provided that it is your primary residence. It does not have to be an entire room but the space must be a defined area. It helps if the area has a door and is clearly separated from the rest of the primary residence. This area or room cannot be used for any other purpose than business if you want to take the home office deduction.

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