The IRS has a special schedule on a tax return for rentals. A schedule is normally an appendage to either a business or a personal tax return. A Rental is reported on a Schedule E. This is where you can locate where your accountant took expenditures related to the rental. Rentals are usually tracked per property opposed to lumping them all together. This tends to be a headache from some new rental owners but it can be made simple with categorization.
It is very difficult to know your true profit with a rental or business if taxes are not factored in. Knowing your tax burden will give you a chance to minimize your taxes coupled with maximizing your investment. A lot of property owners are familiar with the term “cutting the costs” but you should look to also cut your taxes. This is done through awareness of what to track and how to track it.
A question often posed by both new and seasoned investors is what they can write off. When it comes to rentals there are a few key areas to document, track, and deduct.
Closing Costs and Mortgage Interest
Mortgage interest is one of the largest deductions available for Real Estate Investors. Fortunately, this is easy to track as it comes on a form 1098 every year. It is only deductible in the year it is paid. Some closing costs that are deductible include inspections by lenders, appraisals, loan origination fees, and recording fees.
Appliances and Furniture.
When it comes to appliances and furniture, you will need to notate the date it was placed in service. This date is used to determine the amount that can be written off in the initial year and the amount to be depreciated.
Day to Day Expenses
With renters come maintenance, and with maintenance comes expenses. Some deductible day to day expenses related to a rental include: HOA fees, snow removal, lawn care, gutter cleaning, tree trimming, landscaping, garbage removal, utilities, etc. If you are spending money to benefit your tenants’ quality of life, it is most likely a deduction.
Repairs are deductible if they are used to maintain good condition of a rental. Some examples would be broken faucets, leaking windows, paint, repairing a roof, cracked concrete, water heaters, sinks, and plumbing.
There are other repairs that are deducted over the usable life span of the repair. These are usually considered to be major repairs. Some examples include roof replacement, new siding, new driveway, and anything structural.
This is a deduction that needs to be taken. Over the years some accountants have argued to not take it. The IRS deems that a rental property has a life span of 27.5 years. This means that you can take the value of the property and divide by 27.5. Every year your property will receive a deprecation.
If you are using a lawyer to draft a contract that is a deduction and is considered a professional fee. Bookkeepers, accountants, lawyers, property management companies all fall under this same category. If you have to pay someone commission to find a renter, that is also a deduction that is going towards the rental.