For people who have income property as a business this is probably nothing you haven’t already heard but there are a lot of new income property holders. Thanks to the phenomenon of flipping (purchasing houses with the idea of selling them for a profit), some people became accidental landlords when they weren’t able to sell the property without incurring a loss.
The good news is that more deductions and tax strategies are available for rental real estate than almost any other investment. The key is to know what deductions you’re entitled to take and to keep very detailed records.
Just to make clear what is meant by “income property”, one definition is any property owned by an individual or corporation in which a tenant is allowed to use or occupy the dwelling and/or land in exchange for money. For tax purposes you must report any and all money received as rent on your annual federal tax return. You must also report any expenses a tenant pays for improvements.
OK so after you report all the income, here’s what you are entitled to deduct. There are primarily four deductions you can claim with rental property and they are, maintenance and property taxes, insurance and mortgage interest. There are other things you can claim as well such as advertising, commissions paid to rental agents, legal fees, travel expenses, utilities you paid, and the portion of tax preparation paid to file Schedule E, Part 1, which is a form filed with your personal income taxes that lists all rental income and rental expenses.
Then there’s depreciation. The IRS refers to depreciation as an annual allowance for wear and tear. The method used most often in these cases is straight-line depreciation, which basically means subtracting the land value from the purchase price of the property, then dividing by the useful life span. Use IRS form 4562 to calculate and report this amount.
These are just some of the deductions you are allowed to report on income property. Ask your tax professional for mare details.