Will a Rental Property Help on My Taxes?
A rental property is a sound investment that will produce financial gains for many investors. Rental property will also produce a number of different tax advantages for an owner. However, owners of rental property need to understand what types of deductions are available and consult with their tax professional to determine the effect that these deductions will have on their specific tax situation.
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Interest Deductions
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Interest payments made on loans or other obligations incurred managing and maintaining the rental property are tax deductible. These include the mortgage on the property, loans for repairs and credit card debt. Interest incurred due to loans for improvements are not deductible. While only the payments made on the interest are deductible, this amount will add up over the course of a year. Rental property owners should avoid combining personal and rental debts in the same account as this makes determining and documenting the proper amount of the deduction difficult.
Depreciation
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Owners of rental property may deduct a portion of the value of their rental structures each year. The depreciation deduction compensates the property owner for the yearly reduction in value of the structure. Depreciation applies only to the structure, not the land. For commercial property, the structure depreciates over 39 years, while residential property depreciates over 27 ½ years, according to the IRS guidelines. To determine the amount of depreciation, divide the value of the structure by either 39 or 27.5, depending on the type of property. In most situations, this entire amount is deductible each year.
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Travel Expenses
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Rental property owners typically travel quite often managing and maintaining their property. The cost of this travel is tax deductible. Some examples of travel that are eligible for deductions include meeting with repair workers, running to the home improvement store for supplies or dealing with a tenant-related issue. In most cases, owners can choose between using the IRS's standard mileage rate deduction or can calculate the actual costs. Long distance rental property owners may be able to take deductions for overnight travel expenses as well.
Other Expenses
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Rental property owners with a dedicated home office will qualify for further tax deductions. This may include the rent or mortgage cost for that area of the home, a percentage of the home's utility bills and equipment used managing or maintaining the rental property. Expenses from insurance, taxes, postage and advertising the rental property are typically deductible also. The rental property owner's tax professional can provide assistance in determining what specific deductions an owner is entitled to take. The fees charged by the tax professional are typically deductible as well.
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References
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