Having multiple streams of income is certainly a huge part in financial success and rental property is a great source of cash flow. If you have multiple properties, they can eventually be paying for each other as well as the home in which you live. The other great thing about rental property is that if done right, your rental tax liability can be close to nothing.
Mortgage interest and mortgage insurance are both deductible expenses. These are commonly known because you can deduct them for your primary residence that you are not renting out. Remember that your entire mortgage payment cannot be deductible. That’s because part of your payment is paying back money that you borrowed. The other part is paying for the interest cost, and only this portion is deductible. You should receive a form 1098 from your lender at the end of each year showing how much interest was received that year. This form will also include the amount paid for mortgage insurance.
Property tax is also a well-known deduction for the same reason as the mortgage expenses. Property taxes are calculated based on the city’s assessed value of your property multiplied by the rate. Sometimes mortgage companies will pay these property taxes for you through an escrow account. If this is the case, the 1098 form you receive from the lender will also include the amount of property tax paid.
If you paid to have your property listed on websites or other classifieds, these costs are deductible. The amount might not be as significant as the mortgage expenses, but you should take advantage of it regardless.
The travel expenses that you incur to collect rent, make repairs, and maintain your property. If your travel expenses are by vehicle, then you can either deduct actual expenses incurred (gas purchased, repairs made to vehicle, etc) or the standard mileage rate ($0.54 per mile for 2016). If you have rental property out of state and you need to travel there, airfare, hotel, and car rental to maintain that property are also deductible.
Any HOA fees that you pay are deductible. Sometimes these fees are insignificant. But if you have a condominium or townhome, you know that the HOA fees could easily be $400 per month! You can also deduct management fees if you pay a company to manage a property for you.
It is inevitable that your unit will need repairs done at some point or another. If the heater broke and you need to replace it, the cost of the new heater is deductible. If there is a major plumbing leak and you need to pay a plumber, that cost is deductible. Don’t confuse repairs with improvements. Improvements add value to the property and aren’t immediately deductible. If an improvement is made, then the value of the improvement is added to your cost basis in the home and everything is depreciated over time.
This is another major deduction that you should never miss. If you have a mortgage out on your property and you aren’t close to a zero tax liability after all of the previous deductions, the depreciation deduction should be able to get you there. Depreciation is basically the de-valuing of your home over a period of time. It’s not an actual expense that you incur in your day to day activities, it’s just a paper expense for accounting and tax purposes. Think of it as a way to track the book value of your home. This will be useful down the road if you decide to sell your property and you have to calculate capital gains tax.
This is a lot of information but I hope it helps! Real estate could be a great investment because there aren’t many investment tools out there that let you take out a low interest loan in order to make use of the investment. Because you can take out a loan, your initial investment cost is low and your monthly income stream is relatively very high.
If you have been paying a lot of taxes on your rental property, please feel free to contact me and I will be happy to look over your taxes to see if I can save you some money.