- With the exception of refundable deposits, every rent check you receive is income, which creates a taxable event. You can claim Internal Revenue Service, or IRS, approved deductions against your income, reducing your table liability. Understanding your allowable deductions assists with record keeping and knowing how to best structure income and deductions for your rental property. You basic deductions include advertising, insurance, legal fees, associations, equipment rental payments, taxes, utilities, travel expenses and interest. You can also deduct depreciation, section 179 expense and mortgage points .
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RecordsThe IRS requires you to keep records for your rental activities. Bank statements and 1099s issued by property management companies show proof of income. Invoices, receipts and canceled checks constitute proof of payment. Your closing statement, or HUD, along with insurance records and documentation for improvements validate the basis in your home and, consequently, the depreciation deductions on the overall improvements. Use these documents to substantiate your tax records in the event of an audit or review. - Not all payments pertaining to your property rental are deductible. Only the interest portion of your mortgage payment is deductible. The principle simply reduces the loan and has no tax implications. Appliances are not deductible as a normal expense. Rather, you depreciate appliances over their useful life to better match expenses to income. You can use accelerated depreciation methods such as bonus depreciation and section 179 to deduct your cost sooner. Improvements and repairs that add significant value or life to the home qualify for depreciation rather than expense deductions.
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Saving you moneyUsing your rental property for tax planning can be challenging. The IRS deems rental property income and losses to be passive. Passive activities are those in which you do not materially participate. Passive gains cannot reduce active losses, and conversely, passive losses cannot reduce active gains. However, the IRS allows you to claim up to a $25,000 active loss from property rentals provided you materially participate and your income does not exceed the phase-out threshold. Consult the IRS to determine if you materially participate or exceed the annual income phase-out threshold. Your active loss can reduce active income such as wages and business income. For additional assistance with your specific rental circumstances, contact your local enrolled agent, a tax professional licensed by the Department of the Treasury. - You must determine whether you are going to manage the property yourself or if you are going to pay a property management company. Managing the property yourself requires you to maintain any issues yourself including approving new tenants and evicting existing tenants. These are all expenses when you manage the property. Using a property management company only allows you to claim the cost of their service and any additional costs you pay on your own. You also lose the ability to participate actively, eliminating your ability to claim an active loss.
