It’s tax season! Nothing is more exciting for rental property owners. Why? Because we are reminded of how amazing rental properties are for tax benefits! They’re way better than just about any other taxable investment assets.
Why are rental properties so amazing when it comes to tax benefits? Two reasons:
- Rental property income is considered “passive income” by the IRS. Passive income is treated much more favorably than active income (“active income” includes things like W2 income and income from flipping properties).
- Residential rental property is the only investment asset that both appreciates and depreciates at the same time. Both put money in your pocket! Everyone is familiar with appreciation—the value goes up on your property, and that increase in value is money you can keep. Depreciation is a little trickier, but in short, the IRS assumes there will be continued wear and tear on your rental property throughout its life, and they offer you a level of compensation for that wear and tear in the form of pretty substantial write-offs. This isn’t literal wear and tear—if you keep the property pristine, that doesn’t count against you. The details on the write-off are tricky, but just know that you end up writing off that amount for depreciation on your taxes, which in turn increases your return!
Now, for those items that can be written off relating to a rental property and sometimes overlooked. The reason write-offs are important is that they decrease your taxable income on the properties. Meaning, the more the write-offs, the less you have to pay in taxes!
The purpose of this list is not only to help ensure you include everything you can in your write-offs but also to alert you to how many write-offs there really are for residential rental properties in case you are shopping for investments and not completely convinced yet of how great the tax benefits on rental properties are yet!
Here are 25 things that you may be able to write-off on your rental property investment!
- Management fees (e.g. property management)
- Homeowner’s association (HOA) or condo fees
- Property taxes
- Pest control
- Mortgage interest
- Other interest
- Bank fees
- Education/professional development
- Leasing fees
- Legal & professional fees
- Meals & entertainment
- Automobile/car expenses
- Minor improvements*
- Major improvements/new assets*
*There are strict requirements regarding the definition of each of these. Things in these categories are grouped based on how much they cost and other requirements that make them fit into one category or the other, and each is treated differently in terms of writing them off. A licensed tax expert needs to guide you on how to file each of these appropriately
Consult With a Tax Professional
Now for more boring talk about how I insist you work with a tax expert on these: You saw the note about how categorizing repairs matters for how they are filed. In addition to these strict rules, there are more general rules about how to file write-offs for things like travel, meals and entertainment, and automobile expenses. Consult your licensed tax expert for specific instructions on how to do these!
For example, if you travel to one of your out-of-state rental properties to work on it, what involved with that travel can you write-off? There are some things you may not know you can write off about travel, and a lot of it depends on what percentage of the trip is dedicated to the property.
Another one that you will need help on is depreciation. If I told you that to calculate the depreciation, you can take you first need to determine the basis of the property, then separate the land and building costs, then determine the basis in the house, then determine the adjusted basis.
Remember—the less taxable income you have on your property, the less you have to pay in taxes. These write-offs are what decreases that taxable income. And when it comes to rental properties, the write-offs can total such a high amount that either a) you end up paying no taxes on the income you received from the properties, or b) you might actually get a return from them!
On a serious note though about working with an accountant on your taxes: If you own rental properties, I guarantee you are missing out if you aren’t working with an REI-friendly accountant who works with real estate investors on a regular basis. One of the biggest financial perks of rental properties is the tax benefits, and unless you are an accountant yourself, you are absolutely missing out on some of the write-offs you could be taking. The laws also change very often regarding what you can and can’t do, so you need someone who follows those exactly in order to maximize on your taxes.
Do you currently know a tax professional that has experience with rental property? We do and can put you in touch!
Note: I am not a licensed accountant. You should consult a professional licensed accountant for all of your tax and investment matters. This article should be used for nothing more than an idea of the kinds of things you can write off on your rental property investments. It is not in any way meant to be an instructional manual for your taxes.