What Is the Allowable Income Tax Deduction for Rentals?

Written by jeremy slaughter
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What Is the Allowable Income Tax Deduction for Rentals?
(Jane M Sawyer: morguefile.com)

New and experienced property owners alike miss valuable income-tax deductions every year. Every missed deduction results in additional tax you pay. You are legally entitled to claim allowable deductions; however, you are responsible for knowing the deductions to claim. You can seek assistance from the Internal Revenue Service or your local tax adviser.

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The Facts

Renting property produces taxable income. The Internal Revenue Service allows you to deduct expenses incurred to operate and maintain your rental property, to the extent that the transaction has a cost, business purpose, and property or service provided. You cannot deduct your time if you are not a contractor; deductions are actual expenses paid or payable. You also receive deductions for asset purchases over the life of the asset.

Types

There are two primary types of tax deductions for your rental property. First, you can deduct actual expenses incurred such as repairs, maintenance, rental payments, utilities, property taxes, advertising, cleaning, commissions, interest , points, insurance, legal fees and travel expenses. Each of these deductions must be for your rental to be deductible. The other type of deduction your rental produces is depreciation. Depreciation is the expense of fixed asset purchases over the life of an asset. Depreciation aligns expense with the economic life of an asset, matching production of benefits to expenses. Fixed assets include appliances, additions and repairs that add significant life or value to your rental property.

Considerations

Your home mortgage interest is deductible on your taxes; however, upgrades, additions and improvements are not deductible. As you replace appliances and fixtures in your current home, you can upgrade your rental property with these used assets and receive tax deductions. Travel to and from your rental property is deductible at the applicable federal prescribed rate. Consult the IRS to determine the current federal rates as they are subject to change.

Considerations

The IRS requires you to track and record your income and expenses associated with your rental property. Keep receipts and notes as necessary in addition to copies of your tax return. Land is not deductible. The depreciable base of your home is the cost of improvements including the structure, landscaping and land improvements. Never contribute your rental property to an S-corporation. Although you reduce your legal liabilities, you can no longer freely move the property in or out of the corporation in the future. A sale must occur to change any ownership of the property.

Expert Insight

Rent payments you receive in the form of products of services constitute taxable income. For instance, you give a renter three months' rent-free use of your property in exchange for personal property or services. You are then required to report three months' rent as taxable income. You may be able to deduct the service or property received, if it pertains to your rental property or business. Often, property owners advertise a set amount of free or discounted rent to sign a lease. If you do not receive a service or property in the transaction, there is no taxable income. However, if your renter agrees to landscape your property monthly in exchange for three months' rent-free use, you are required to report the landscape service as rent. Conversely, you can deduct the cost, or fair value of the landscaping. For additional guidance understanding your income tax on your rental property consult an enrolled agent.

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