The Most Important Tax Implications Involved with Buying Investment Properties

by Carson BuckSeptember 10, 2018

6 Things about Rental Properties That Can Impact Your Taxes

Investing in real estate has long been, and continues to be, a reasonably sound financial investment for those looking for a reliable source of supplemental income. The IRS will consider the income being generated by your property as taxable income, so this is certainly something you must keep in mind.

The tax implications, however, may not be as severe as you might be thinking, especially if you understand the tax write-off opportunities granted by the IRS to landlords. With that in mind, here are six things you need to know about investment properties and how they can affect your tax liabilities.

buying a rental property

Rent Income

The IRS considers all monies you receive from your rental property as income, not just the monthly rent payment. This means any fees you charge tenants for things like breaking their leases early, the portion of the security deposit you keep, advance payments, and more, are considered income and therefore taxable.

Mortgage Interest

If you are paying a mortgage on your investment property, then you can deduct your rental income amount from the mortgage interest you pay, which will help reduce your tax threshold. You can also deduct the interest paid on credit cards that you use to pay for property-related expenses like repairs, renovations, appliances, pest services, and the like.

Property Depreciation

Over time, a rental property’s value can depreciate. Because of this, the IRS allows landlords to compensate for this decline by allowing them to reduce their taxable rental income by the property’s annual depreciation value. This deduction is available after the first full year of renting your property, and you can use it every year up until the total amount of your deductions equal the cost of what you paid for your rental property.

buying a rental property

Travel Deductions

If you use a vehicle to perform tasks associated with your investment property, then you can deduct the standard business mileage rate for the miles you drive. If your role as landlord requires you to pay tolls, parking fees, meals, or other travel costs, then you can also deduct 50% of those expenses as well.

Things like fuel, oil, insurance, maintenance, new tires, registration and license renewals, and any other expense related to keeping the car on the road can also be deducted from your total rental income.

Property Repairs

The IRS allows the cost of property repairs to be deducted from the total rental income, if you hired a professional to perform the work. If you did the work yourself, then you may be able to deduct the cost of materials, but not the labor. Keep in mind that if you hired a professional, you will need to provide proof to take advantage of the full deduction.

Other Business-Related Write-Offs

Owning a rental property is considered running a business, so there are many different things you can write-off on your taxes. For instance, if you pay for advertising, tax accountant services, a business-only cell phone, a property management firm, or anything else pertaining to the running of your property, then you can claim deductions for them, as well.

buying a rental property

The Most Important Rule – Keep Your Records Organized

With so many expenses capable of being deducted from your taxable rental income, you need to be fastidious about keeping organized records. If you ever get audited, you need to be able to back up all your deductions with the necessary paperwork and receipts. This should be Rule #1 for any property investor.

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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.