Investing in a rental home can be one of the wisest investments a person can make. From immediate monthly cash flow and long-term equity, to saving money on your tax bill, becoming a landlord can prove to be a very lucrative move. Managing your rental home or portfolio can be a lot of work, but that’s why most investors choose to hire a full-service property management company such as C.A.B. Group, LLC to manage their single-family rental home portfolios. There’s nothing better than “mailbox money” – income that arrives either in your physical or virtual mailbox, in a somewhat fixed frequency with a minimum of management; also known as passive income. Passive income is the holy grail for those of us seeking financial independence and/or early retirement. And while you’re collecting rental income, you can also take advantage of the tax advantages becoming a landlord can afford you.
Many rental property expenses can be used to offset your rental income. IRS publication 527 discusses rental income and expenses and how to report them on your tax return. Numerous rental home expenses are tax deductible. Landlords should save and itemize their rental expense receipts and take these deductions on Schedule E of their federal tax return. A copy of Schedule E can be found here. On average, a landlord will spend four hours a week on maintenance and recordkeeping for each individual rental property.
Common rental property expenses that are deductible include money spent on advertising, cleaning and maintenance, commissions paid to rental agents, HOA/Condo dues, insurance premiums, legal and accounting fees, mortgage interest and expense, property taxes and any landlord paid utilities. RVs, trailers and houseboats are also considered rental homes so long as they have sleeping, cooking and bathroom quarters. The IRS also considers foreign rental homes when it comes to tax deductions so don’t exclude any rental properties located outside of the United States when preparing your tax return. And don’t forget to include the cost of travel on your return. If you’re traveling to your rental home to show it to a potential renter, collect rent or security deposit, or to maintain the property, you are entitled to claim the standard mileage rate plus the cost of any tolls or parking. Even if traveling outside of your local area or abroad, the IRS recognizes any expenses incurred to “manage, conserve, or maintain” the property.
While the cost to repair your rental property in order to keep it in working condition is recognized and can be written off immediately like other normal expenses, the cost to improve said property must be depreciated over a number of years. The difference between a repair and an improvement is the same as fixing something that’s broken versus replacing something before it’s broken. Depreciation is a reduction in the value of an asset with the passage of time, due in particular to wear and tear. Rental properties are subject to depreciation as they become less valuable with an increase in the amount of wear and tear they receive. Rental properties are subject to depreciation the minute they become available for rent. In general, rental homes are depreciated over 27.5 years, but only while the home is being rented to tenants. The second the home is no longer used as a rental property, you have to stop depreciating it. Depreciation can be a very valuable tax break, but you must understand how to do it correctly. For more information on how to depreciate your rental property, read IRS Publication 946, “How to Depreciate Property”, and use form 4562.
The rent you collect from your tenant every month counts as income. You offset that income, and lower your tax bill, by deducting your rental home expenses including depreciation. You can even write off a net loss on a rental home as long as you meet income requirements, own at least 10% of the property, and actively participate in the rental of the home. Active participation in a rental is as simple as placing ads, setting rents, or screening prospective tenants. So long as you meet the minimum requirements imposed by the IRS, be sure to utilize the many tax advantages available to you as a landlord.
The above blog post is intended for general informational purposes only. For more information about specific tax laws and consequences, please consult a tax professional.