With vacation rentals on the rise, many people search sites like VRBO or Airbnb when going on vacation, heading out of town for a wedding, or attending a kids’ sporting events. It’s no wonder these sites have become so popular. Staying in a home is often more comfortable than a hotel room, especially if there are a lot of people on the trip. There are more bathrooms, bedrooms, and even a full kitchen in most cases, and people can spread out and have more privacy.
You may be asking yourself if you could turn a profit by renting out your home or vacation home when it isn’t in use. The answer could be yes, but understanding the tax deductions associated with listing your property for rent is crucial if you want to maximize your financial returns. The pros at Adams Accounting Solutions can help you understand the various deductions allowed by the IRS that can significantly reduce your taxable income, thus enhancing your property’s profitability. So, what are these deductions?
Mortgage Interest
The most substantial deduction for rental property owners is mortgage interest. If you have financed your rental property, the interest you pay on your mortgage is deductible. This can be especially beneficial in the early years of your mortgage when you’re paying the most interest.
Depreciation
The IRS allows you to depreciate your rental property even though it will increase in value the longer you own it. You can depreciate the residential property over a 27.5-year period. Your goal in using this tax strategy is to allocate as much of the home’s purchase price to the building to maximize your depreciation expense because land never depreciates. The depreciation deduction is to account for wear and tear, even if you haven’t had to put any money into improving the home.
Repairs and Maintenance
Speaking of improvements, your expenses incurred for any repairs and maintenance on your rental properties are deductible. This includes expenses like painting, fixing toilets or drains, having trees trimmed, landscaping or replacing broken windows. To qualify for this deduction, the IRS states that the expenses must be ordinary, necessary, and directly related to the property and keep it in good working order.
Capital Improvements
Capital improvements, on the other hand, are enhancements made to the property such as adding a deck, patio, pool, or renovating the kitchen or bathroom. These types of improvements are permanent upgrades to a rental property that significantly increase its value and extend its natural life and are taxed differently than repairs and maintenance.
Property Taxes
No one likes paying property taxes, but the good news for rental property owners is that they’re tax deductible! Property taxes are assessed by local governments to fund public works such as roads, schools, police, firefighters, and parks. These taxes are calculated as a percentage of a property’s assessed value. By taking these deductions, you can significantly offset costs, especially if your rental property is in a region with higher property tax rates. Of course, you must pay on time to capitalize on this deduction fully.
Insurance Premiums
Your insurance premiums for your rental property are also deductible. This includes fire, theft, and flood insurance, as well as the cost of landlord liability insurance. Deducting these expenses can help reduce the risk of unexpected costs you might incur.
Professional and Legal Fees
As per the property management company Renters Warehouse, any fees you pay to attorneys, CPAs, property management companies, or other professionals who are associated with your rental activity can be deducted. These fees must be directly related to the rental activity, such as an accountant’s fee for preparing your tax return, fees related to the unpleasant task of evicting a tenant or having a real estate financial advisor run an analysis on your property.
Travel Expenses
If you travel to your rental property for business reasons, such as inspections or meetings with tenants or contractors, you may deduct these costs. This includes expenses like your plane ticket, miles driven, or a place to stay. To deduct these expenses, you must be sure to keep receipts and other records/documents to validate the business purpose of each trip.
Utilities
According to the financial technology company, Stessa, if you pay the utilities for your rental property, such as water, gas, or electricity, these expenses are deductible. Even if the utilities are included in the rent, you can deduct them if the payment is your responsibility as the owner.
The Bottom Line
For rental property owners, tax deductions can be a valuable tool in improving cash flow and maximizing the return on your investment. Consult with our friendly and knowledgeable staff at Adams Accounting Solutions to navigate the complex tax laws associated with owning a rental. We will absolutely help you take advantage of all applicable deductions and give you peace of mind in following tax law.
