What Can Be Claimed on Rental Property?
Landlords must file a Form 1040, Schedule E along with their income taxes when they file with the Internal Revenue Service. Schedule E captures all expenses related to the rental property and also details income. Valuable deductions should not be overlooked, so it is important for landlords to keep an excellent paper trail throughout the year so that no legitimate claim is forgotten when tax time comes around.
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Property Taxes, Insurance and Interest
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Some of the largest expenses are quite straightforward to claim. Property taxes paid to the city or county are fully deductible, as are any amounts paid for homeowner's insurance. Mortgage interest secured by the rental property is also deductible. If the rental unit is part of an owner-occupied multifamily home, the interest, property taxes and insurance must be apportioned to the rental unit based on its percentage of the entire property.
Condominium or Homeowners Association Fees
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Monthly condominium or homeowners association fees can be claimed. Those fees may include building insurance, utilities, property management fees and other expenses, but association fees should be claimed as one lump line item rather than trying to break up the fee into different categories. Typically this expense is deducted under the line labeled "Management fees."
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Repairs, Maintenance and Supplies
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When a plumber unclogs a drain or a cleaning lady spruces up a unit in between tenants, the costs are deductible. Repairs and maintenance can be claimed, as well as parts and supplies. From the most obvious expenses, like a roof repair or a call from an electrician, to the most mundane, like a new set of keys or a roll of paper towels, all legitimate out-of-pocket expenses are deductible. Landlords deduct for labor expenses for garbage removal, cleaning, landscaping or snow removal paid to contractors or other laborers.
Miscellaneous Deductions
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Advertising a vacant apartment, commissions paid to a real estate broker, utilities, fees paid directly to a property manager and professional legal or accounting expenses can be claimed. Landlords may also deduct auto and travel expenses, like mileage, if they make trips to the rental property themselves. Schedule E has separate line items for most expense categories.
Depreciation
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One of the trickiest deductions to understand is depreciation. Each year landlords may claim a deduction for the depreciation of the property. The value of the property --- minus the value of the land --- gets divided by 27.5 years and then deducted annually until the end of that time period. For example, a house valued at $225,000 divided by 27.5 yields a tax deduction of $10,000 per year. Improvements and appliances are also depreciated rather than deducted. Kitchen cabinets, carpet, furniture and appliances are depreciated over a five year schedule. Depreciation calculations and cost bases are tricky, so landlords would be wise to consult with a tax specialist.
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References
- IRS: Schedule E (Form 1040)
- IRS: Reporting Rental Income, Expenses, and Losses
- IRS: Rental Income and Expenses; Real Estate Tax Tips
- IRS: Publication 527, Residential Rental Property
- "Nolo Law for All"; Top Ten Tax Deductions for Landlords; Stephen Fishman, J.D.; 2011
- "SmartMoney"; Should You Rent Out Your House or Sell It?; Aleksandra Todorova; July 2010
Resources
- Photo Credit tax forms image by Chad McDermott from Fotolia.com
