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There are several advantages to owning rental property. You have a tenant helping you pay down the mortgage and meet the property expenses, your asset grows in value over time, and you can use real estate to diversify an otherwise bland investment portfolio.
One benefit many investors forget about is that it can help you reduce your tax liability. Owning rental homes involves a number of tax advantages, and we’re highlight some of those today.
Zen Rent manages single-family homes, condos, and townhouses in and around the Phoenix area, including in Mesa, Scottsdale, Chandler, and Gilbert.
Interest and Depreciation Deductions
Deducting for interest is one way investors can save money at tax time. Mortgage interest is pretty obvious; if you have a loan on the property you’re renting out, you can claim a deduction on the interest you pay on that loan. But, you can also deduct interest on any loans you take out to fix up your rental property or on credit cards you used to pay for products and services specifically for your rental.
Depreciation is another big deduction. You can depreciate your rental property over the standard IRS number of 27.5 years. If you earn more than $25 million on your rental property investments, you’ll want to depreciate those properties over 30 years instead, to avoid the limits on your interest deduction that the 2018 tax bill incorporated.
Repairing your Rental Property
An important distinction here is repairing versus improving. You can deduct any costs associated with repairing your property. If a new roof is necessary or the furnace quits, those repairs are tax deductible. However, renovating a bathroom or installing a hot tub are things that would not qualify as repairs. Those are improvements, and you cannot deduct the cost.
Make sure you deduct these expenses in the year that they’re paid for. Excellent documentation and sound accounting software can help you keep track.
Professional Services Associated with Rental Property
Investors and rental property owners are also permitted to deduct the cost of any professional services that are used while acquiring or renting out a home. This means your brokerage fees, real estate commissions, property management fees, legal costs, accounting fees, and insurance agent’s cost can all be deducted from your income. Many landlords worry about the cost of professional Phoenix property management, but the tax deduction that’s received usually means it’s paying for itself.
Travel and Personal Costs
Make sure you’re deducting the travel costs that are required in visiting your investment property. Whether you’re going back and forth to make repairs, show the vacant home to prospective tenants, or conduct inspections, you can deduct mileage and gas. If you’re an out-of-state investor, airline tickets, hotel bills, and rental car expenses can also be deducted. Again – good documentation is key. If you don’t have an accounting software or program in place, use an experienced property manager or make sure your CPA is carefully tracking these things for you.
These are just a few of the tax-friendly benefits that come with renting out a Phoenix property. If you have any questions or want more information, contact us at Zen Rent. We’d be happy to tell you more.
