4 Must-Know Tax Tips for Rental Property Owners

by Carson BuckApril 3, 2017

What You May Not Know Could Be Costing You Plenty

It’s tax time again. And, while you may be a whiz at doing your local, state, income, and federal taxes (or paying someone else to do them for you), what you don’t know about the passive income that you earn on rental properties could be costing you big time.

According to the investment website Bigger Pockets, some of the biggest benefits of owning rental properties are the tax benefits, and one of the biggest ways to squander that income is to not take advantage of them. Here are four big things to pay attention to when doing your taxes (or getting them done by a professional) to ensure that you are maximizing your benefits.
Tax Tips for Rental Property Owners

1 – Mortgage Interest

That’s right, even if someone is paying your mortgage for you by way of rent, you still get to deduct the interest portion of your monthly mortgage payment. This is one of the big benefits listed on the IRS Tips on Rental Real Estate Income, Deductions, and Recordkeeping page. Regardless of who pays, homeownership has its privileges.
Tax Tips for Rental Property Owners

2 – Repairs and Maintenance

Any repairs you do and any maintenance done to your rental properties may be deducted from your income made on the property. This may apply even if the repairs and maintenance were performed by a rental property management company on your behalf, by the tenant as a deduction from their monthly rent, or by you on your own.

Make sure to keep track of all expenses associated with the management, maintenance, and upkeep of your rental properties. Also, make sure to consult with a tax professional with regard to deducting labor costs for yourself or your tenant without a receipt or invoice.

Last of all, make sure not to conflate maintenance and repairs with improvements. A new fence only counts as a repair if there was an old fence in place before. When in doubt about the designation of a specific expense, double check with your tax professional.

3 – Property Tax

Much like the interest, the local property tax you pay on your rental (or that your tenant pays for you), is deductible from the income you make on the rental.
Tax Tips for Rental Property Owners

4 – Depreciation

Perhaps the biggest and most complicated deduction you can take against your rental income is for everyday wear and tear on the rental itself, as well as the cost of improvements you make on the property by way of deducting depreciation.

Since depreciation is a fixed percentage of the property’s value, and it isn’t pegged to the local real estate market, it has nothing to do with equity gains you may make through market appreciation (except as reflected in your rising property taxes).

Get Back Every Cent You Deserve

Basically, the IRS is only looking to charge you a percentage (in federal tax) of what you make on the property after any expenses. Like a business, you are not being taxed on your gross profit, but on the net profit that you pocket.

Understanding what’s allowable as a deduction can help you maximize your profit on your rentals, as well as your experience as a landlord earning passive income while building equity. Just make sure that you run your deductions by a tax professional prior to filing. The IRS charges harsh penalties for mistakes (intentional or otherwise).
Tax Tips for Rental Property Owners

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About The Author
Carson Buck
Carson is a real estate agent based out of Phoenix, Arizona. Carson loves data and market research, and how readily available it is in today's world. He is passionate about interpreting these insights to help his clients find and buy their perfect home. Carson got into the real estate industry because he loves the feeling of handing over the keys to a new home to happy clients. In his free time, he works on his backyard bonsai garden and spends time with his wife, Julia.