Rental Property Tax Deductions

The IRS provide many rental property tax deductions for your real estate investments. In fact, the tax code provides terrific incentives for you to buy and own rental property for the long term. Most of these tax benefits are lost if you flip real estate. You even lose the long term capital gains tax advantage when you flip real estate.

Since tax law changes constantly you need to always consult IRS Publication 527 to get the latest information for your tax preparation. However, if you use tax preparation software such as TurboTax, these programs generally have all of the latest information and may be more current then an IRS publication.

There 3 types of rental property tax deductions that you can take advantage of when owning rental property :

• Direct expenses for the rental property


• Indirect expenses related to operating a rental property business


• Depreciation of rental property

Direct Rental Property Tax Deductions

Rental property tax deductions of direct expenses is pretty straight forward. These are items that you can link directly to your rental property from day in and day out operations.

1. Advertising


2. Cleaning and Maintenance


3. Commissions paid to a property management company


4. Insurance - for both the property and any umbrella liability policies


5. Legal Fees


6. Expenses for the vehicle you use in your rental property business


7. Interest in any loans for your rental property


8. Taxes and tax preparation fees


9. Office expenses


10. Repairs to the rental property - things that cost to maintain it but do not extend the life of the building


11. Utilities


12. Travel expenses for any thing related to your property business

Depreciation of Rental Property

Many people fail to understand depreciation and rental property. Rental property depreciation is not an optional expense that you can take when you own a rental property for the long term. When you are flipping real estate you can not deduct depreciation, but if you own rental properties you must take depreciation. Rental property depreciation can only be taken on the non-land part of a property. The depreciation rental property is for the buildings and improvements.

When you purchase rental property you must calculate the basis for depreciation. Rental property basis includes the value of the building and many of the purchase costs. Any time you make improvements to the property you must recalculate the depreciation basis. For example, when you replace the roof you must add this to the tax basis and cannot claim it as a repair expense.

The benefit of depreciation rental property is that you can claim a tax deduction now but will have to pay taxes in the future. Although tax laws may change and make you tax liability greater in the future, generally, due to the time value of money it is better to have $1 now then to have $1 ten or twenty years from now.

You can also depreciate any property that you buy for to manage your rental property such as computers, phones, tools, etc. Use Section 179 to claims small capital purchases in the same tax year.

Indirect Rental Property Tax Deductions

Indirect expenses are generally related to operating a rental property business. The home office expense is the prime example, but you can also take deductions for educational materials or seminars that you use to gain knowledge about owning rental property.

Some home office expenses that can be used:

• a percentage of your home can be depreciated


• utility expenses for your home based on the percentage of usage for home office


• a portion of Internet service or any other services used in your home office

You may be able to offset up to $25,000 of your rental property losses against regular income. If either you or your spouse is a real estate professional that loss may be unlimited.

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