Deductibles on Property Rentals
Rental properties provide a gold mine worth of tax deductions. Furthermore, because the income and expenses for rental real estate are reported on Schedule E, the deductions are subject to none of the limitations that can cap personal tax deductions. All that you do is report your gross rental and other income on your Schedule E, list your expenses, subtract them out and calculate your net profit. The net profit is the only thing that makes it to your Form 1040.
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Operating Expenses
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All of the customary operating expenses for a rental property can be deducted from its income. This includes everything from property taxes to utility bills. You can also deduct such items as repairs to the building and even the cost of a lawn care or snow removal service. The IRS also allows insurance as an expense.
Ownership Expenses
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All of the expenses that you incur in owning the building are also deductible. These can range from the cost of your rental license to the cost of a third-party manager that you pay to help you with the property. You can also write off the cost of traveling to the property for inspections, or even the cost of traveling to meetings or seminars related to owning your property. The interest on the mortgage debt that you have placed on the property is also fully deductible.
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Depreciation
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One of the largest benefits of owning rental real estate is the ability to deduct depreciation. Depreciation is a way to account for the building's gradual deterioration over time and lets you reduce your taxable income without actually spending any money. Simply divide the cost basis in the building, but not the land, by either 27.5 or 39, depending on whether you have residential or commercial rental property. The product of that division is your annual depreciation which you fill in on your Schedule E, further reducing taxable income.
Avoiding Taxes at Sale Time
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When you sell your rental real estate property, you will have to pay recapture tax on the depreciation that you took and capital gains taxes on any profit. If you use the proceeds to buy more real estate, though, you can structure the transaction as a 1031 tax-deferred exchange. These transactions allow you to defer any capital gains or recapture taxes and carry your cost basis forward into the new property.
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