A third of the 123 million households in the US are occupied by renters, so you’re in the right place if you’re looking to rent out a property.
You could make a lot of money by renting out your property if you make the right investment. It can be difficult to manage a rental property without the right knowledge.
Offsetting costs so you make a profit is one of the most challenging parts of managing rental properties. Using the right tax deductions can help you save on rental property costs.
It is possible to reduce your overhead and make your rental more profitable by taking advantage of the tax advantages of a rental property. Taxes on rental properties and how to leverage advantages are explained in the following guide.
How Much Does Rental Income Get Taxed?
Rental income is usually taxed at a rate matching federal standards, which is 20% or less. A Medicare surtax of 3.8% applies to renters in areas with Medicare surtaxes.
A total tax rate of 22.8% would apply to your rental income if you rent a property in an area where the tax rate is 19% and the Medicare surtax applies.
Tax-saving tips
The expense of maintaining your rental property can, however, be deducted from your tax liability. To help you save on taxes, we’ve compiled a list of 11 ways.
1. Expenses associated with advertising
Due to the fact that they are business advertising fees, you can deduct the costs you spent to promote your property.
Online services that promote your rental can charge you listing fees that are tax-deductible. You can deduct the cost of placing ads online or in the newspaper.
A small business can even deduct the costs of developing a new website, which may cost more than $10,000.
2. Bonus depreciation and 100% depreciation
Property values naturally decline over time due to depreciation. The building is normally used in this way.
Business owners are required to write off a portion of their assets’ value every year until they are worthless. Rather than the land itself, the asset is your structure and improvements.
Property types have different depreciation rates:
There is a 27.5-year rental structure
A 15-year warranty is provided on fences, driveways, and landscaping
The warranty period for new appliances, furniture, and flooring is five years
Once your property begins generating income, you can claim depreciation. You cannot deduct the time you spent fixing it up before renting it out.
Usually, you are allowed to depreciate your assets every year, but there’s a rule allowing you to depreciate them all at once. Depreciation at 100% is referred to as bonus depreciation.
As a result of this legislation, most depreciable business assets can be written off during the year they are placed into service.
By 2023, this IRS regulation will start decreasing every year until it goes away completely. Now is the time to take your deductions early.
3. Maintenance and repairs
Tax deductions are available for any costs associated with keeping your rental livable. Cleaning, maintenance, and repairs are included.
Understand the difference between a repair and an improvement. Depreciation will be required for improvements.
A room can be painted, the lawn can be mowed, and carpets can be cleaned as examples of repairs and maintenance.
There are many improvements that can be made to the home, including adding a room, re-landscaping the lawn, and removing the carpets for laminate flooring.
4. The provision of professional services
There is a possibility that rental property owners will not be able to run the entire operation themselves. Multi-property owners are especially susceptible to this.
Most likely, you have hired professional services to help you run your business. A real estate agent, accountant, or attorney are experts that you may hire.
Your business will run smoothly despite these high expenses. You may be able to deduct them from your taxes.
5. Services
The landlord may pay for some utilities, while tenants may be responsible for others.
A utility bill includes expenses such as electricity, trash collection, gas, and water. Utility payments can be deducted from your rent if you are a landlord.
6. Workspace
Tax deductions apply if you’ve set up a dedicated space for your rental business. If you set up your own home office or rent a commercial space, this can be your office space.
Also eligible for deductions are the costs associated with renting an office space, like internet, printer ink, supplies, and even monitoring software.
If the space is exclusively used for work, you can claim this deduction. There’s no need for a whole room – you can even use the corner desk in your bedroom for your rental work.
Rental business owners might have trouble claiming their home office, but it can pay off in the long run. If you are considering a deduction for the space, we recommend discussing it with your accountant.
7. Traveling
Home offices as well as rented offices allow you to deduct travel expenses.
Travel costs from your office to the rental office can be deducted if it is your main place of business.
Travel between your home and the rental property can be deducted if your home office is your main place of business.
It is tax deductible to travel locally to collect rent, maintain, and manage your property.
As of 2022, the IRS’s standard mileage rate is 58.5 cents per mile, so you can choose between deducting the actual expenses or using the standard mileage rate.
8. Taxes on property
The monthly costs of owning a rental property include property taxes. In addition to paying for road repairs and park maintenance, property taxes go to the local government.
With a tax deduction, you can reduce the amount of property taxes you have to pay for your rental. The cost will still be a little lower, even though it’s not a huge difference.
9. Interest on mortgages
Taking out a home loan is one way to finance your rental property. The interest you pay on your mortgage can be deducted if you do this.
If you refinance your property with cash out, be careful. A business owner cannot deduct interest paid on cash used for purposes unrelated to the business.
10. Materials
For assistance with your property, you can hire professionals who can clean or repair it. DIY takes on all the costs and work, but you’re taking on all the work yourself.
It is tax-deductible to purchase cleaning products, paint, and air filters for the maintenance of your property.
When you use a rental property calculator, you should keep track of how much you spend, because in some instances, a contractor or repairman may require you to purchase these items.
The importance of being insured
Unlike homeowners’ insurance, rental property insurance can be deducted, which is a significant amount.
The best part is that if you work out of your home office for the rental property, you may be able to deduct some of your primary residence’s insurance.
Deductions that can’t be claimed
There are many expenses associated with your rental property that can be deducted from your taxes, but not all of them. In spite of the fact that they seem like they should be tax-deductible at first glance, there are a few expenses that you cannot deduct from your rental property income
Rent lost
High vacancy rates can be caused by unexpected situations, resulting in renters backing out. It is not possible to deduct the rent value you would have earned if someone lived there during that time.
An improvement
Depreciation is a better way to recover the costs of improvements than listing them as a tax deduction.
Additionally, you cannot deduct traveling costs for improvements, such as replacing your already functional flooring with a new one.
It is important to distinguish between an improvement and a repair here. Repairs are made when a storm damages the roof. You’re improving the curb appeal of your home if you replace it.
Rent that has not been paid
A tenant who does not pay rent cannot be deducted from income (unless you use accrual accounting, which already accounts for the transaction before the money is received).
Since you won’t be paying income taxes on income you don’t receive, this shouldn’t come as a surprise.
How to Take Advantage of Rental Property Tax Advantages
When you start your rental business, take advantage of the tax advantages of a rental property.
Our goal is to help you find “rental properties near me.”. No matter what kind of rental property you need, we are here to help you find it.
We can help you rent out your property together if you contact us.