Top Three Tax Deductions for Rental Property Owners

Rental real estate provides some of the best tax deductions available to any investor. Your property manager should be knowledgeable in this area and willing to share their expertise with you. The following are usually the best three deductions.

  1. Interest

The largest tax deduction for a landlord is usually mortgage interest. You can deduct interest on loans you have taken to buy or improve your rental property. Let’s say you have a $200,000 loan on your rental property at 6% interest. The interest deduction is roughly $12,000 a year.

  1. Depreciation on Real Estate

Depreciation represents the decline in the value of an asset. The IRS decides what the useful life of an asset is, thus setting its depreciation period. As an example, a computer has a useful life of 5 years, and residential rental property has a useful life of 27.5 years.

Rather than deducting the entire cost of your rental property in the year you buy it, the IRS says you have to deduct the cost over 27.5 years. Note that you can never depreciate the value of land.

On a rental property worth $180,000, you can take roughly $6500 as a depreciation deduction each year. There?are various ways to calculate depreciation, refer to the IRS tax publications for an exact amount.

  1. Repairs

The IRS defines repairs as something that keeps your property in good operating condition. Repairs include repainting, fixing leaks, replacing broken windows. You can deduct the cost of repairs each year. Do not confuse repairs with improvements. Improvements are changes that add to the value of the property or prolong its useful life, such as replacing a roof. You depreciate these costs.

Do the math to see the great tax benefit. Let’s say you are collecting $1200 a month in rent, or $14,400 a year. In the examples above, the top two tax deductions alone amount to $18,500. You will not pay any tax on the rental income you collect.

Stay tuned, I will review a few more of the tax deductions in my next blog.