One of the more popular ways to earn passive income is by renting out property. If you own rental property, it’s important to understand which expenses are tax-deductible, and which aren’t.
What Rental Expenses are Tax Deductible?
You can deduct many expenses related to your rental property. If you pay someone to manage your property, or you pay commissions to a rental agent, that is tax-deductible. But you can also deduct the costs that you incur in the following ways:
- Maintenance on the property, including cleaning
- Utilities
- Advertising the property
- Related legal fees
- Dues to homeowner/condo associations
Insurance premiums - Taxes
- Mortgage interest, and fees
- Accountant costs (including those to help you prepare your tax return forms related to your rental property)
- Specific travel expenses, as long as the travel was for performing tasks such as collecting rent or maintaining the property, including mileage on your car
Realize, though, that you can’t deduct the time you spend working on your rental property. If you spend 10 hours a week managing the property, you don’t get to deduct that as a rental expense. You need to have paid money, and you usually need some documentation to show for it.
Another consideration is whether you are repairing your rental property or improving it. The IRS views these two activities as entirely different from each other. A repair is more of a one-time fix to a specific problem, such as fixing a broken pipe. Your repair cost is entirely deductible in the year you spend the money.
Contrast a repair with an improvement to the home. If you replace all the windows in your rental property, or if you upgrade the electrical wiring throughout the property, you are improving. That means that you need to depreciate the cost over several years. You can’t deduct the entire cost of an improvement at once to offset your rental income.
What about Losses?
It’s possible to deduct losses from the rental property from your other income if you meet specific requirements. The requirements to deducting rental property losses include :
- You own 10% or more of the property
- You actively participate in the rental of the home (screening tenants, advertising, or collecting rent, etc.)
- Meet IRS income requirements set each year; your ability to take a deduction for the entire amount of the loss phases out with an increase in income.
If you plan to claim losses, you need to make sure that everything is documented, from the income you receive from the rental property to the expenses that you are responsible for. Keeping good records is essential. Things can also get complicated if you have a vacation home that you use for personal use, as well as rent out for up to 14 days a year. You don’t have to pay taxes on that income, but your deductions are also more limited. If you have questions, you should check IRS Publication 527, or consult with a knowledgeable tax professional.