The real estate market has been picking up steadily in the recent years after the market crash experienced a few years ago. While many people might have lost their homes, rental property owners were also affected severely by the crisis. In fact, many of them have been breaking even for years and it is only now that they have started to make a decent profit. Unfortunately, the cost of owning rental property keeps rising. In between property management costs and taxes, investors are often left with meager profits. However, this does not have to be the case. Rental property owners can claim several tax deductions to minimize their tax liability. The following are rental owner tax tips to help you make your investment more profitable.
Tip #1: Reduce Tax Liability with Deductions
Most of the expenses incurred while maintaining rental property are tax deductible. Some of the qualifying expenses include; advertising, mortgage interest, insurance premiums, cleaning and maintenance, legal fees, utilities and commissions paid to letting agents. Accounting fees and the cost of procuring a mortgage are also tax deductible expenses.
Tip #2: Know the Limits
While most of the expenses highlighted above are tax deductible, including travel expenses, it is important to note that the IRS tax code has some limits. For instance, only travel expenses incurred for purposes of collecting rent, showing the property to prospective tenants and carrying out maintenance works are tax deductible. If you decide to travel outside your local area for whatever reason, you cannot write off the whole cost. That said, be sure to limit your travel expenses.
Tip #3: Know the Difference between Improvements and Repairs
The cost of repairing your rental property can be written off, but the cost of carrying out improvements can only be recouped over several years through depreciation. For instance, if you replace a cracked window pane, you can write off the whole cost in the current year. However, replacing the whole window is considered an improvement, so you can only write off part of the expense in the current year, and the remainder in the coming years.
Tip #4: Claim Net Loss
After writing off all qualifying expenses and depreciation, rental property owners can claim a net loss to lower their income tax liability. There are rules governing how much a taxpayer can claim as a net loss on rental income, so be sure to consult widely before claiming this deduction.