Rental Property Tax Benefits

People who own residential rental properties are afforded numerous tax benefits. You are allowed to offset your rental income with rental expenses. If you own rental property it is critical that you understand the tax advantages afforded to you that will enable you to protect your income and lower your tax burden.

Here are a few of the deductions the IRS grants you on your tax return if you own rental property:

Mortgage Interest – You can deduct the mortgage interest you pay on your rental property’s mortgage payment.

Depreciation – You can depreciate your rental property by deducting some of the cost on your tax return each year. For residential property, the IRS states that you must depreciate the property over 27.5 years. You must EXCLUDE the value of the land from the value of your home prior to calculating depreciation.

Repairs – You can deduct the cost of repairs. Examples of repairs include repainting your property, fixing gutters or floors, fixing leaks, plastering, and replacing broken windows.

Travel Expenses – If you own a rental property the IRS allows a tax deduction when you drive anywhere for your rental activity. For example, when you drive to your rental property to deal with a tenant complaint or go to Home Depot to purchase an item for a repair, you can deduct your travel expenses.

Generally, if you use your personal vehicle for rental activities you can deduct the expenses using one of two methods; actual expenses or the standard mileage rate. For 2006, the standard mileage rate is 44.5 cents a mile for all business miles.

Home office – You may deduct expenses related to your personal residence as home office deductions. These include utilities, insurance, depreciation, and repairs allocated to the business use of your home.

Employees and Independent Contractors – Whenever you hire anyone to perform services for your rental activity, you can deduct their wages or services as a rental business expense. This is the case whether the worker is an employee (for example, a resident manager) or an independent contractor (for example, a repair person).

Insurance – You can deduct the premiums you pay for almost any insurance for your rental activity. This includes fire, theft, and flood insurance for the rental property, as well as landlord liability insurance. If you pay the insurance premium for more than one year in advance, each year you can deduct the part of the premium that will apply to that year. You cannot deduct the total premium in the year you pay it.

Legal and professional services – You can deduct fees that you pay to attorneys, accountants, property management companies, real estate investment advisors, and other professionals. You can deduct these fees as operating expenses as long as the fees are paid for work related to your rental activity.