Tax Deductions on Rental Property

Real estate is and will continue to be an attractive investment option for individuals that have the capital and ability to get into the business. There is a plethora of ways to invest in real estate including commercial investments, fix and flips, and construction. However, one of the most appealing forms of real estate investment is owning rental property. Rental properties can generate cash flow and provide steady income, but another appealing aspect about them is the tax savings that they can generate.
Under IRS rules landlords can take many deductions to offset the income generated from their rental income. The deductions take include:

  • Mortgage Interest
  • HOA Fees
  • Property Taxes
  • Insurance
  • Repairs and maintenance
  • Utilities

However, under the passive activity loss rule, you cannot deduct expenses greater than the rental income you earned that year on the property unless your AGI (adjusted gross income) does not exceed $100,000 for the year, you actively participate in running the rental business, and your total losses on real estate activities you are participating in do not exceed $25,000. These figures are based on persons filing their tax returns individually and can vary based on your tax filing status. But, in essence, the passive activity loss rule provides exceptions for individuals who are offsetting their losses on one rental property with gains on another.

The other major tax deduction that rental property owners can take is depreciation. Depreciation is calculated on a 27.5-year schedule that is provided by the IRS. However, only the income generating portion of the property can be depreciated. This means that between the land and structure that make up the total value of the property only the structure can be depreciated. So, if a rental property had a fair market value of $500,000 and the land was worth $150,000 the tax basis of the property for depreciation purposes would be $350,000.

Rental properties can be attractive investment options for their tax benefits as well as their consistent income generation. If you would like to discuss further do not hesitate to reach out.