If you’re looking to rent out a property, you’re in the right place – renters reside in around 36% of the US’s 123 million households.
With the right investment, your rental property could be extremely lucrative. But without the right knowledge, rental property management will become much more difficult.
One of the hardest parts of managing rental properties is offsetting costs so that you make a profit. As it turns out, there are several ways that you can save on rental property costs by using the right tax deductions.
The tax advantages of a rental property can significantly reduce your overhead and make your rental more successful. The following guide will explain what you need to know about taxes for your rental property and which advantages you can leverage.
What Is the Tax Rate on Rental Income?
In most cases, the tax rate on rental income will match federal standards, which is 20% or less. If you rent a property in an area that has Medicare surtax, you’ll pay 3.8% more.
So if you’re renting out a property in an area where the tax rate is 19% and you’re responsible for the Medicare surtax, your total tax for your rental income would be 22.8%.
Ways to Save on Your Taxes
But you can save on taxes by subtracting expenses associated with maintaining your property for tenants. That’s why we’ve included 11 ways you can save on your taxes below.
1. Advertising Expenses
Costs that you spent to promote your property are tax-deductible because they are business advertising fees.
So if you pay listing fees to online services to adverse your rental, that’s tax-deductible. Placing ads online or in the paper is tax-deductible.
Even building a new website – which can cost more than $10,000 for a small business – is tax-deductible.
2. Depreciation and 100% Bonus Depreciation
Depreciation is the natural decline in the value of your property as time goes on. It happens with the normal use of the building.
The IRS requires business owners to write off a bit of that asset’s value every year until it is worthless. The asset is the structure and the improvements you’ve made on it, not the land.
Deprecation rates depend on the type of property:
- The rental structure: 27.5 years
- Fences, driveways, landscaping: 15 years
- New appliances, furniture, flooring: 5 years
You can be fine claiming deprecation as soon as you start renting out your property. If you spent time fixing it up before renting it out, this time is not tax-deductible.
You may know that you can record your depreciation every year, but there’s actually a rule that allows you to take the deprecation deduction all at once. This is known as 100% bonus depreciation.
With this regulation, you can choose to write off the costs of most depreciable businesses assets during the year they’re placed into service.
In 2023, this IRS regulation will start decreasing every year until it will no longer exist. So if you want to take your deductions early, now’s the time.
3. Repairs and Maintenance
Any costs that you have to spend to keep your rental in livable condition are tax-deductible. This includes repairs, maintenance, and cleaning.
Make sure that you’re clear on what counts as a repair and what counts as an improvement. Improvements will need to be depreciated.
Examples of repairs and maintenance include painting a room, having the lawn mowed, and getting the carpets cleaned.
Examples of improvements include adding a room, replacing the lawn with new landscaping, and tearing out the carpets for laminate flooring.
4. Professional Services
In many cases, rental property owners won’t run the entire operation themselves. This is especially the case when they own multiple properties.
If this sounds like you, you likely have hired professional services to help you run your business. Experts that you may hire include real estate agents, accountants, and attorneys.
While these can be high expenses to pay, they’ll keep your business running smoothly. And chances are, they’re tax-deductible.
While you may have tenants held responsible for some of their utilities, it’s also common for landlords to pay for some of them.
Utilities include costs like electricity, trash service, gas, and water. If you pay utilities as a landlord, you can deduct them from your rent.
6. Office Space
If you’ve established a dedicated space to work on your rental business, it’s tax-deductible. This can be either a rented commercial space or a home office that you’ve set up.
You can also deduct the associated costs with the office space, including internet, printer ink, office supplies, and even the software your computer uses to keep track of tenants.
To claim this deduction, you must be using the space regularly and have it reserved exclusively for work. And it doesn’t even have to be an entire room – the corner desk in your bedroom that you reserve exclusively for your rental work counts.
Claiming your home office can be a bit of a mystery for rental business owners, but it can be lucrative. We recommend discussing how you use the space with your accountant so they can guide you on your deduction.
You can include the costs of travel in your tax deductions both with a home office and rented office space.
If your rental office is your main point of business, you can deduct the cost of travel every time you go from your office to the rental.
If your home office is your main place of business, you can deduct the costs of local travel between your home and the rental property.
Local travel costs to collect rent, maintain, and manage your property are all deductible.
You have two choices here: deduct the actual expenses, or use the IRS’s standard mileage rate, which is 58.5 cents per mile in 2022.
8. Property Taxes
Owning a rental property will require you to pay property taxes, as they’re the ongoing cost of ownership. Property taxes go to the local government, which pays for things like road repairs and park maintenance.
Luckily, you can reduce the amount of property taxes you have to pay for your rental with a tax deduction. While it’s not a huge difference, it will still cost a little less.
9. Mortgage Interest
One of the ways you can choose to finance your rental property is by taking out a home loan. If you choose to do this, you can deduct the mortgage interest that you pay.
But be careful in the event that you do a cash-out refinance on your property. If you use that cash for a purpose that’s unrelated to your business, that interest won’t be deductible.
You may hire professional cleaning services or repairmen to assist you with your property. But if you prefer the DIY approach, you’re taking on all of the work and its costs on your own.
All supplies you use in maintaining your property, like cleaning products, paint, and air filters, are tax-deductible.
It’s important to keep track of what you spend with a rental property calculator because there may be some cases in which a contractor or repairman will require you to buy these items and they’re only responsible for the work.
You’ll be happy to hear that you can deduct your rental property insurance, which is significantly more than homeowner’s insurance.
Even better, you can deduct part of your primary residence’s insurance if your main workplace for the rental property is out of your home office.
What You Can’t Deduct
While many costs of your rental property are tax-deductible, it’s important to know which aren’t. Below are a few property rental expenses you can’t deduct – even if they seem like they should be tax-deductible at first glance
Unexpected situations may cause high vacancies and renters to back out. In these situations, you can’t deduct the rent value you would have earned in that time had someone been residing there.
You can’t list improvements as a tax deduction because you’re recovering the costs through depreciation instead.
You also can’t deduct costs related to traveling for improvements, like driving to the store to replace your already functional flooring.
Key to note here is the difference between an improvement and a repair. If you replace the roof because a storm ruined it, that’s a repair. If you replace it because it adds more curb appeal, that’s an improvement.
If your tenant stops paying rent, you can’t deduct the lost income (unless you use accrual accounting, which already accounts for the transaction before payment is received).
This shouldn’t be a surprise, as you’re not going to pay income taxes on the income you don’t receive.
Leveraging the Tax Advantages of a Rental Property
Use the tax advantages of a rental property to your benefit when starting your rental business.
If you’re in the hunt of looking for “rental properties near me,” we’re here to help. Whether you want a rental property for sale or you want to rent out your existing property, our rental property services are top-notch.
Contact us to learn more about how we can rent out your property together.