If you’ve decided to invest in a rental property to earn additional income or have a vacation house that you’ve finally decided to list on Airbnb, you do have to report that rental income to the IRS, but you can also deduct the expenses of owning that rental property. What are the most common rental property tax deductions that you can take?
Mortgage Interest and Property Taxes
If you have a mortgage for the rental property, you can deduct the mortgage interest you paid to your lender throughout the year. That mortgage interest will be reported to you on a 1098 form. You can also deduct the property taxes that you pay for your rental property.
You cannot, however, deduct the actual mortgage payment that you pay every month—only the interest.
Repairs and Maintenance
When renters come and go from the apartment or house, the space can experience a lot of wear and tear. You will have to clean the apartment after someone moves out, possibly give the walls a new coat of paint, and make minor repairs to holes in the walls or broken lighting fixtures. These minor repairs and maintenance can be deducted from your rental income as expenses. Even the cost of maintaining the yard can be deducted.
Depreciation
Depreciation is another form of a deduction that can be taken on a rental property. Depreciation is essentially a deduction that happens over a period of time, so instead of taking the entire deduction in one year, it gets spread over several years. Major improvements to a rental property, such as a new garage or roof, are deducted as depreciation.
Other Common Expenses
Other common expenses that can be taken include the usual expenses of running a business, such as advertising, insurance, professional fees for a lawyer or accountant, office expenses, management fees if you pay someone else to manage the property, and utilities if you are the one paying for them (and not the tenant).
How Are Rental Property Expenses Reported
Rental property income and expenses are reported on a separate form called Schedule E. These deductions are separate from your personal itemized deductions and will be subtracted from your rental income before that income is included in your adjusted gross income (AGI).
If You Live In and Rent the Same Space
When you live in an apartment and/or house and rent out one part of the property, you can still deduct rental expenses, however, you can only deduct them for the percentage of the property that is rented to somebody else and not the portion that you live in.
Owning a rental property can earn you additional income, and deducting the expenses from that rental income can help lower your tax bill. If you’re considering renting out a property or already do and have tax questions, give us a call at Moore & Paquette Tax Group.
**Please note that tax law can change often, and the above should not be considered legal advice. Always consult with a tax preparer before completing a tax return.