Tax Deductions for Rental Property

Which expenses can be used as tax deductions for rental property is easy to determine.

First think of the expenses that you incur while maintaining your property. Here are some easy rental property tax deductions that come to mind:

  • Cleaning and Maintenance

  • Property Taxes

  • Insurance

  • Management fees

  • Utilities
Other tax deductions for rental property that you might not have thought of yourself are:
  • Advertising - like when you advertise your property for rent.

  • Auto and travel - the expense must be ordinary and necessary to the rental activity like collecting rent or managing or maintaining the property. You can also deduct 50% of the meal expenses during the time that you traveled.If you travel to improve your property the cost of the travel is considered part of the improvement and should be deducted as such. (see how to deduct improvements below.)

  • Agent's commissions

  • Tax advice and tax preparation fees related to the rental property.

  • Telephone calls - you can deduct the actual cost of the telephone calls related to the rental activity (like calls to the renter). But you cannot deduct the basic phone line fee or taxes if it is your first personal phone.
Here are some tax deductions for rental property that are treated differently than you might think:
  • Mortgage payments - there are two parts to the mortgage payments,

      the interest - the percent that you pay the bank for the mortgage

      the principal - the part of the mortgage that pays for the actual cost of the property.

    The interest part can be deducted as mortgage interest but the principal cannot.

    The exact amount that was interest can be seen on from 1098 that you get from your bank.

    What happens to the principal, why can't you deduct it?

    Well, when you're paying the principal you are actually paying for the property itself. The cost of the property gets deducted a special way. It gets depreciated (or divided evenly) over 27 1/2 years. Every year you get to deduct one part of the cost of the property as depreciation expense.

    The expenses you incur to get the mortgage cannot be deducted the first year but you must divide it (or amortize it) over the life of the mortgage.

  • Repairs or improvements - When any work is done to your property you have to determine if it is a repair or an improvement. A repair is deducted the year it was done and improvements are depreciated over an appropriate amount of years - depending on how long you expect the improvement to last.

    How do you know if it is a repair or an improvement?

      Repairs - A repair is when you fix or maintain something in the property. It keeps the property in good condition but does not add value to it.

      Improvements - An improvement add value to the property and makes it more useful.

    An example of the difference between an improvement and a repair is:A new air condition system is an improvement and fixing the system is a repair.

  • Prepaid Insurance - You can only deduct the part of the insurance that applies for this year even though you paid the premium for later years. You will be able to deduct the rest of the premium during the years that it applies.

  • Vacant rental property - You can deduct the expenses for managing and maintaining property even if it is vacant as long as it is available for rent.

  • Renting out part of your home - When you only rent out part of your home you can only deduct expenses related to the rental. If the expenses pertain to the entire house you must divide the expenses according to the percentage of the property that is rented.

Updated January 26, 2012

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