Top Rental Property Tax Deductions

The reason the rich are rich is because they not only make money, but they keep money! There are a lot of people I know who make more money than I do, but I keep more of my money than they keep of theirs. The biggest expense most Americans have is taxes.

Now, let me say for the record that I am not against paying taxes. I am thankful every time I drive down a paved road that I pay taxes. We must have taxes in order to function. I do, however, want to keep as much of my money as the IRS will let me.

As an entrepreneur I am not trying to lower my taxes just for my own selfish gain either. You see, if an entrepreneur saves money on taxes, he or she will likely re-invest a portion of that money. That in return will likely help the economy in some way.

So when we talk about maximizing rental property tax advantages we aren't talking about doing anything illegal or immoral. We are just talking about getting the most deductions that you are allowed to. A lot of rental property owners do not take all of the deductions that they can. I am going to list out the major rental property tax deductions that rental property owners can take.

Remember though that the best way to maximize every property tax deduction is to seek the help of a CPA who specializes in real estate.

Before we begin to talk about rental property tax deductions you need to know what type of investor you are: passive or professional. If you are passive, then you can only deduct up to $25,000 against your income. If you are professional you can fully deduct your losses. I believe the requirement is 750 hours per year spent on your rentals to be considered professional. Talk to your tax professional about carrying over losses over $25,000 to next year if you are passive.

• Interest- if you have a loan for a property, you can deduct the mortgage interest as a business expense. If you have a line of credit, credit card, or something of the sort that you have used for services or things related to your rental then the interest on that is also a great rental property tax deduction.

• Depreciation- This is the beautiful thing about rental real estate... Your property goes up in value every year while on taxes it shows it going down. How wonderful is that!!! You see, when you purchase rental property you cannot deduct the price in the year in which you purchased it. But you can deduct a portion of the cost over several years (typically 27.5). Isn't that great! I love depreciation! Especially when in reality my property is appreciating and not really depreciating. I gotta hand it to Uncle Sam, that is nice.
  
  
• Segmented Depreciation- if you thought regular straight line depreciation was great, listen to this. In the last few years the government has decided that while the life of real estate should typically be depreciated over 27.5 years, they realize that a lot of assets on the property are not going to last anywhere near 27.5 years. So they allow you to depreciate them quicker.

  Some people also call this cost segregation. It works like this: You buy a $200,000 duplex. You separate the non-structural elements such as carpet, appliances, wall coverings, etc and determine that $30,000 worth of items on your property are shorter lived items that count towards rapid depreciation. The remaining $170,000 will be depreciated over 27.5 years.

  Basically you get more depreciation expense each year and that helps you keep more of your profit. Check with your accountant about doing a cost segregation analysis. There is a great website called DepreciateEm.com that helps you figure your segmented depreciation.
  

• Repairs- anytime you fix a broken toilet or repaint a room- that can be deducted. Any repair that is necessary in order to keep the property functioning can be deducted. Any repair that isn't necessary for the property to function can be considered an improvement and therefore not deducted the year you have it done. It would instead be added to the base cost and depreciated out over time.

• Travel Expense- Anytime you drive to your rental to collect rent or perform a repair or anything of the like, you can deduct the cost of travel. There are two ways you can do this. First, you can deduct the actual expenses (gas, upkeep, repairs). Or secondly you can use the standard mileage rate. Talk to your accountant about which one is best for you.

• Employees- This would include contractors, property managers, or anyone you pay to perform a service related to your rental.

• Insurance- The premium you pay for property insurance is considered a cost of doing business and is therefore considered a rental property tax deduction.

• Home Office- If you use your office at home for work on your rental property, there are certain ways you can deduct it. Check with your accountant on how.

• Cell Phones and Computers- If you use your cell phone to conduct work related to your properties or if you use your computer to keep records or do your bookkeeping for your rentals then those items can typically be deducted to a certain amount.

• 1031 Deferred Tax Exchange- I saved this one for last because it is my favorite... If you sell a property and make a profit, you can defer the taxes as long as you re-invest in another property within so many days. You cannot do that with hardly anything else. For example, if you sell a stock and re-invest you still have to pay the capital gains tax on your profit. But with you real estate you can avoid the tax by re-investing. 1031 deferred tax exchanges are great if you want to re-invest. Note though that this isn't a way to get out of taxes it is instead a way to defer or put off paying taxes. Read more about 1031 tax exchange.
  
  

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