Tax Breaks for Rental Properties
Rental properties can be profitable investments for many reasons. Rental properties can produce a monthly stream of income from rent payments and can appreciate in value over time. But rental properties also offer significant tax breaks that investors can use to reduce their tax liability. Though the specific tax advantages for each investor will vary, investors should be aware of the potential tax breaks they may be eligible to take.
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Depreciation
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Depreciation is a tax deduction for the purchase cost of a rental building or other equipment. Owners should note that only structures and equipment and not the land are subject to depreciation. Though owners only get to take a percentage of the cost each year, the tax savings can be substantial. The IRS sets guidelines for the depreciation period of different types of rental property. For example, residential rental property depreciates over 27.5 years while commercial rental property depreciates over 39 years.
Professional Costs
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Many investors hire property management companies or an onsite property manager for rental properties. Rental property owners may also use the services of an attorney, accountant, tax professional, landscape companies, etc. Whether these service providers are contract workers or employees, the costs for these services are tax-deductible to the property owner. Rental property owners may use these service providers for both rental and personal property, but the owner must make certain to deduct only the costs associated with the rental property.
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Financing Costs
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Owning rental properties can be expensive and many owners will need to borrow money for various costs. Fortunately, the interest charged on these loans is tax-deductible. Though the mortgages on the properties will produce the largest amount of interest, other interest charges are deductible as well. Some examples include loans for property repairs, interest on credit cards used for purchasing needed supplies and interest charged on service accounts. Property owners should be careful to not mix rental property and personal costs in one account as this will complicate record keeping.
Other Tax Breaks
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Insurance costs for rental properties are tax-deductible. If the rental property owner has employees used for the business (property managers, janitors, etc.) and health or other insurance is part of their compensation, the costs of the insurance are deductible as well. Financial losses on a rental property may be deductible as well.
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References
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