Rental Property Tax Breaks for Landlords

Tax benefits of renting your lake Havasu home.

Taxes – don’t pay more taxes than what is required by law. 

Often costs that you pay to maintain your property or ordinary necessary expenses, may be tax deductible, such as…

1)  The fee to have your property professionally managed (Property Management Fee).

2)  Any repairs or maintenance that is required to keep it habitable.

3)  Landscaping, maintenance fees.

4)  Cost to advertise the home for rent.

5)  Pest control costs.

6)  Your property taxes.

7)  HOA fees.

8)  Professional, fees such as an accountant, or real estate attorney.

9)  The mortgage interest you pay on your rental home.    

Tax depreciation deduction.

The IRS allows landlords to depreciate a rental home over 27.5 years to recapture the cost of wear and tear. However, the land that the home is built on does not wear out, only the cost of the home plus other items that increase the cost basis such as a new roof, appliances, or carpeting may be depreciated. 

For example, let’s say you paid $350,000 for a rental home. The lot value is $100,000, which means your cost bases for the home is $250,000. This means that the $250,000 will be used for depreciation purposes.

Let’s say your cost bases is $250,000 and you add a new roof to the home for $20,000, not your adjusted cost basis is $270,000.  So, the cost basis of your rental home is $270,000 divided by 27.5 years which equals $9,818 per year.

Items like appliances are on a different depreciation schedule so you must always consult with a CPA.

One catch when you depreciate a rental home is that when you go to sell it, you have to “Recapture” the depreciation, which means you must pay it back to the IRS.

Regarding selling your Lake Havasu Rental house.

You have an opportunity to perform what is called a 1031 tax deferred exchange.  You can defer paying capital gains tax and tax on depreciation recapture by conducting a Section 1031 tax deferred exchange. 

Normally, when a rental property is sold, the depreciation expense is recaptured and taxed as ordinary income to an investor, up to a maximum rate of 25 percent (depending on the investor’s federal income tax bracket). 

In addition to paying tax on depreciation recapture, an investor also pays a long-term capital gains tax of 15 percent, or 20 percent on any profit from the sale.

With a 1031 exchange, instead of paying taxes, an investor can put the money to work by investing in another rental property. The rules and restrictions relating to a Section 1031 exchange are complex and an investor may wish to consult a licensed professional. However, there are three main 1031 exchange rules to follow:

• Replacement property must be of equal or greater value to the one being sold.
• Replacement property must be identified within 45 days.
• Replacement property must be purchased within 180 days.

Rental property owners can conduct 1031 exchanges indefinitely to defer paying capital gains and depreciation recapture taxes. If an investor decides to sell the properties, any taxes owed will need to be paid. 

Instead of selling rental property, some investors keep their portfolio and draw rental income until eventually passing the property to their heirs. 

When a property is inherited, the cost basis is stepped up to the current market value of the property, and any outstanding capital gains tax and depreciation recapture tax liability is eliminated for the heir.

Owner expenses are also deductible.

Even when Lake Havasu Property Management takes care of the tenant and home, there may still be expenses an owner can deduct to reduce taxable income:

Money spent on dues to belong to a real estate investing club, subscriptions to real estate or business periodicals, and tuition paid for continuing education like the https://www.roofstockacademy.com, can normally be deducted from income generated from a rental property business.

Travel

Rental property owners can generally deduct travel expenses, such as airfare and lodging, provided they meet the following criteria described in IRS Publication 463:

• Travel must be mainly for business and have a clear business purpose.
• Majority of the time must be spent on business activities and not leisure activities.
• Travel expenses must be ordinary and necessary for the real estate business but not be overdone, such as staying a reasonably-priced hotel versus a five-star resort.

Owners may also be able to deduct auto expenses related to traveling to the rental property. 

Other Tax Breaks you can discuss with a CPA.

1)  Self-employed FICA tax benefits.

2)  Pass-through deductions.

How is rental income taxed?

Rental income is reported on Form 1040, Schedule E and lists the revenue, expenses, and depreciation for each rental property owned. The income or loss from Schedule E is then reported on Schedule 1 (Form 1040), and on line 8 of Form 1040, 1040-SR, or 1040-NR as additional income. 

Income from a rental property is included as part of an investor’s total income and taxed according to the investor’s federal tax bracket.

Keeping accurate records 

To profit from the tax benefits of owning a rental property, the IRS requires investors to keep good records. Good records help investors to:

• Monitor rental property performance
• Prepare financial statements.
• Identify the source of income and expenses.
• Track deductible expenses.
• Prepare tax returns.

If a tax return is selected for an audit, investors must be able to provide documentary evidence such as receipts, canceled bills or proof of payment, and support for travel expenses. Investors who are unable to provide evidence to support tax deductions may be subject to additional taxes, penalties, and interest.

Final thoughts

There are a variety of tax benefits that come with owning a rental property, but to claim them investors need to have the back-up to support their claims.

A good way to automatically keep track of income and expenses for a rental property is by using Lake Havasu Property Management.

Our area of expertise is only property management. This information is sort of a check list of discussion items you need to discuss with your CPA or tax attorney before you make any decisions regarding buying property or renting property.