Guide to Tax Deductible Expenses
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If you own rental property, it is important to make sure that you understand possible deductions in order to improve your profit margin as much as possible. As the owner of rental property, it is always a good idea to consult a tax attorney or tax consultant in order to ensure that you have a good understanding of the items which may be tax deductible. The following is a guide to some of the most common items which are frequently tax deductible for owners of rental property.
One of the most important things which must be understood when you are determining what you may be able to deduct is the difference between improvements and repairs. Many owners of rental property commonly make the mistake of believing that anything they do to their rental property is tax deductible. This is not always the case. A repair is essentially anything that you do to the property in order to keep it in good condition. As such, it is often tax deductible for the year in which the repair is paid for. Common examples of repairs would include repairing a broken toilet, painting, replacing faulty light fixtures, etc.
On the other hand, an improvement is something that you do to the property in order to add value to it. As such, it is not usually tax deductible at the time when you pay for them. However, you may be able to recoup the cost of improvements by depreciating the cost over the life expectancy of your property. Common examples of improvements would include the addition of a garage or a new roof, etc.
Mortgage expenses are often one of the biggest and most common tax deductions you can take when you own rental property. Of course, this only applies if you have a mortgage on the property. It should be noted that any expenses which you incur in order to obtain the mortgage are not actually deductible at the time you pay for them. Common examples would include appraisals and commissions.
Once you begin making the mortgage payments you will typically be able to deduct the interest portion of the payment. In the case of an interest-only loan, that would account for your entire payment. It is always a good idea to keep very good records; however, you should receive a Form 1098 from your mortgage company that will detail how much you have actually paid in interest for that calendar year.
In some cases, you may incur travel expenses in relation to caring for your rental property. Keep in mind that travel expenses are typically only deductible if they are incurred in order to either maintain your rental property or to collect rent. In the event you had to travel to make improvements to the property, these expenses are not deductible immediately. Instead, you may be able to recover the cost as part of depreciating the improvements.
It is important to keep in mind that you usually have two options when it comes to deducting travel expenses. You can choose to deduct the actual expenses or you can choose to take the standard mileage rate. Check with your tax advisor for the option that benefits you the most.
There are also many other expenses which you may be able to deduct on your taxes. These expenses may include property insurance, lawn care, taxes, tax return preparation fees and any losses which result from casualties such as earthquakes, floods, thefts, hurricanes, etc.
If the rental property which you own is a condo or a cooperative, there may be some special rules which will apply. For example, with a condo you may pay assessments or dues which are intended to provide for the care of the commonly owned property. These areas would include recreational areas, elevators, lobbies and the actual building structure itself. When renting out a condo, you can typically deduct expenses such as repairs, taxes, interest and depreciation; however, you cannot usually deduct any expenses which were spent on improvements. These costs must be depreciated over the life expectancy of the property, just as it would be when you own a single family rental.
With a cooperative, you may be able to deduct expenses such as the maintenance fees. Capital improvements are a different matter however. You would not typically be able to deduct the cost of improvements and you also would not be able to depreciate the cost. Instead, you would need to add the cost of those improvements to a cost basis in the stock of the corporation. If this situation applies to you, be sure to speak with a tax attorney or tax consultant.
And finally, always make sure you are prepared to back-up any expenses which you deduct on your taxes. These expenses must be carefully documented and you will need to make sure you that you can provide that documentation if needed, including all receipts.
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