Owning a rental property is a huge part of the American dream.
Renting out a residential property can be a solid investment, but there are many tax rules that must be followed in order to claim income and expenses properly.
Many rental home expenses are tax-deductible. This means you need to document all expenses; keep receipts, invoices, bills and any other documentation throughout the year.
Good records are really important. Records will help you monitor the profitability of your rental property, prepare your financial statements, keep tax-deductible expenses and prepare your returns. These records must support the income and expenses you report.
Keep each contractor’s tax ID number, especially if they are unincorporated, and submit the amount you paid them on IRS Form 1099-MISC. If you paid contractors less than $600 over the course of the year, this form is not required. However, you are still allowed to deduct the expense.
What qualifies as an expense? There are two types of expenses: current and capital expenses.
Current expenses are items that help keep the property in good working condition and livable. Current expenses help you operate your rental business.
Capital expenses are items or anything that increases the value of the property: Improvements, Betterment's, Restoration, Adaptation. These items cost hundreds (or more) of dollars.
In general, you can deduct:
Advertising – Any money you spend to advertise your property for rent is deductible. It might be online, print or radio;
Auto and travel – Any travel expenses related to your rental property. For example, if you drive your personal automobile to check on your rental property or drive to the store to purchase a part for a repair;
Cleaning and maintenance – Any works that put the property back in its original condition: Cleaning supplies, Light bulbs, smoke detector, etc., Pest control, Landscaping;
Commissions – Some real estate agents charge the landlord a commission based on the yearly amount collected;
Insurance – You can deduct the premiums you pay for almost any insurance for your rental activity. If you have employees, you can deduct the cost of their health and worker’s compensation insurance;
Legal and other professional fees – Any operating expenses related to hiring lawyer, accountant, or other professionals is deductible;
Management fees – A management fee is a periodic payment that is paid by an investment fund to the fund’s investment adviser for investment and portfolio management services;
The mortgage interest paid to banks – Since the main loan on a rental property is likely mortgages, this is the first interest figure to consider. You can also deduct points, etc. as a form of prepaid interest;
Utilities – If you pay any utilities for your rental property, you can deduct them. These include: TV/Cable/Internet, Electricity, Gas, Garbage/Recycling, Water & Sewer
Depreciation expenses or depletion – Careful planning can permit you to deduct, in a single year, the cost of improvements to a rental property that you would otherwise have to deduct over 27.5 years