10 Rental Property Tax Deductions
As a Property Manager, you may not be aware of all the tax deductions available for your rental property. There are certain items you’re probably already spending money on, and by simply claiming these deductible expenses for your rental property, you’ll keep more money in your pocket when your taxes are done.
In this article, we’ll walk through 10 simple rental property tax deductions to make when you’re filing taxes.
What Are Tax Deductions for a Rental Property?
A tax deduction is an item you can subtract from your taxable income, helping lower the amount of taxes you owe.
You only have to pay taxes on the net income earned from your rental business — or in other words, the rental income minus all the related expenses. This is also referred to as your taxable income.
For example, if you earned $12,000 in collected rent, but paid $8,000 in expenses on that property, you would only pay tax on the $4,000 difference, known as your “taxable income.”
What Impact Can Rental Property Tax Deductions Have?
Properly deducted expenses can make the difference between being profitable and having a loss on your rental business. For an average Property Manager who is in a marginal tax bracket of 25%, each deduction can result in savings of 25 cents per dollar.
Here’s how that works: The amount saved by each deduction is dependent on your current income tax bracket. So, a deduction of $3,000 reduces your taxable income by $3,000 (not your income). Your true savings is really the amount of tax that is not paid since you were able to take the deduction.
To figure this out, take the amount of the deduction (in this case, $3,000), and multiply it against your income tax bracket. For a Property Manager with a marginal tax rate of 25%, a $3,000 deduction would result in $750 of savings.
10 Rental Property Tax Deductions for Property Managers
These are 10 simple deductible expenses for a rental property that every Property Manager should be aware of and consider as they file taxes.
- Mortgage Interest
Your biggest expenses are likely your monthly payments for the property you own, so mortgage interest deductions may be one of the larger deductions for homeowners.
According to Rocket Mortgage, “This itemized deduction allows homeowners to count interest they pay on a loan related to building, purchasing or improving their primary home against their taxable income, lowering the amount of taxes they owe.”
- Home Equity Loan Interest
This includes interest on the home loans and also for lines of credit or credit cards related to investing in your properties. Keep in mind you can only claim a deduction for payments made for interest, not all interest accrued.
You also should be careful to separate credit cards and not commingle personal and business expenses. Otherwise, you’ll have to go through your credit card and remove all personal expenses.
- Insurance
Your homeowner insurance expenses may be covered in your mortgage, but any business insurance you have is also an expense to remember.
This could include fire, flood, theft, general liability, and other policies you have to protect your properties or business.
- Utilities
Make sure you are tracking expenses for all utility payments. These are tax-deductible and truly add up. One helpful way to track expenses is to set up a business checking and business credit card completely separate from your personal accounts.
You may have tenants paying you to cover the utility bills, but you would still claim the utility expenses as a tax deduction because the money you are being paid for utilities is going to count as income.
- Homeowner Association or Condo Dues
Be aware of any other fees you are incurring for your properties. If you’re paying an annual fee for a homeowner association, this is another cost you can deduct.
- Salaries and Management
If you have a team of contractors, property managers, assistants, or anything else, make sure you are capturing the expenses related to your people.
- Repairs and Maintenance
One of your larger expense items will inevitably be repair and maintenance. This includes routine monthly maintenance like lawn care or cleaning, and also larger repairs due to property damage.
You’ll have expenses for the direct costs and also any contractor working on the repairs. You should also keep track of interest payments if you take out a loan or credit for repairs.
- Advertising and Marketing
Not all expenses are related to your property. As a business owner, you are also spending money on marketing, advertising, local community involvement. All of these are business expenses and should be deducted.
- Attorney or Accounting Fees
While we’re talking about taxes, keep in mind if you owed taxes from last year, this expense is now tax-deductible. If you paid an accountant to file for you, expense the fees for their work.
The same applies to any professional service either from a lawyer, accountant, etc.
- Office Supplies
Anything you buy for your rental property business operations, like notebooks, a printer, or some tools you’ve been needing, can be counted towards rental property tax deductions.
It’s best practice to keep these supplies in separate transactions and pay for them with a business credit card.