Rental Property Tax Tips- The Seductions of Deductions -
Owning rental property is a way to make money, and you’re going to have to pay at tax time. The rent you collect and any expenses paid by the tenant count as income to you. The same goes for deposits, if you don’t return them, and any rents that you receive in advance.
But-thankfully-there are tax laws for landlords so you can take every advantage that’s coming to you. Because getting your fair share of deductions is what it’s all about!
If you and a partner-your spouse or a relative-own this together, then you should form an LLC. That’s a limited liability company, and it protects each of you individually from becoming responsible for the costs of this property you’ve undertaken jointly. Even though this step won’t necessarily make a difference in your profit or loss, it’s an important one to take.
Actually, you should become an LLC even if you own the property alone. It still serves to protect your personal assets from any business losses. In either case, you’ll need to file Schedule K-1 (Form 1065-B), and you’ll list your passive or nonpassive income or loss on Schedule E of your 1040.
Interest is your biggest deduction as a landlord. You can deduct the interest of your original mortgage for the property. If you have any equity loans to improve the place, you can deduct that interest as well.
Depreciation is another huge deduction for landlords. For this you take the value of the home and divide it by 27.5, the expected life of the place. That’s the amount you can take as a depreciation expense.
Most landlords think they can only use this fraction of depreciation over the course of 27.5 years. But you can take advantage of so-called segmented depreciation. This type of depreciation means you separate what will deteriorate in the short term from what will last for those 27.5 years. It works like this: Suppose you have a property worth 250,000. Normally, you would divide that amount by 27.5. Your yearly deduction would be $9,090.
But with segmented depreciation, you deduct items that will not last the life of the home: We’ll use the carpeting, the appliances, and the fence around the place. For round figures, let’s say that equals $10,000. Maybe you think those items will last ten years. And you know you’ll have to replace the roof in five years: $15,000. So you subtract the total of these items from the value of the home–$250,000 minus $25,000. Now you have three totals: $225,000 to depreciate over 27.5 years. $10,000 to depreciate over ten years. $15,000 to depreciate over five years. That gives you a deduction of $8,181, plus $1,000, plus $3,000, which add up to $12,181. Much better!
These are other items that are deductible:
Basic repairs: Paint, materials to fix the roof or gutter, repairing leaks, railings, or other such items.
Travel: For the year 2009 you can deduct 55 cents for each mile you travel locally because of your property. This includes visiting a tenant who has a complaint or going to the store for repair materials.
Insurance expenses, including casualty or flood insurance for the property as well as your business liability insurance.
If you have anyone working for you, the money you pay for worker’s compensation or employee insurance is deductible. (A caveat here-if you are an LLC, you may have to pay taxes on yourself.)
If you consult a lawyer or other professional regarding the property, it’s deductible.
Contractors’ fees when you can’t make a repair yourself are deductible.
Your home office space, represented as a fraction of your total living space, is deductible, but only if that space is utilized solely for the business. The same applies to any workshop you have for rental property repair. (Another caveat-this deduction is almost always a red flag to IRS auditors.)
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