Top 12 Rental Property Tax Deductions & Benefits [+ Free Worksheet]

Cody Cromwell
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This one isn’t for property investors, but for first-time homeowners who file an installment plan. Every year, the IRS considers how much you bought your home for and your average local home prices. Then they estimate how much less your home is worth today than what you paid. That’s called depreciation.

Depreciation is calculated based on the amount of money sacrificed to buy your home compared to the current home value. According to the IRS, when you purchase your home, you give up some money. We usually don’t think of this as a gain, because you’re getting more out of the money you put into your home than the money you put in. But, it is. The IRS recognizes this as a depreciation expense.

This is your biggest deduction on your tax return. For property tax purposes however, it’s an extremely complicated calculation. You can’t just work the IRS depreciation table wherever that number falls. To find out how much you paid for your home and how much the IRS thinks it is worth, they show you a Homeowners’ Tax Book.

I would highly recommend you learn how to work the Homeowners Tax Book on your own and for those who are new to the Tax Return Landscape it is a great place to start.

Depreciation Example for Rental Property

Let’s begin our discussion of rental property deductions with depreciation. Depreciation is the tax deduction available for the cost of the Building, Furniture, Fixtures, and Appliances that make your home more functional. For the purposes of the tax deduction, all of these items will be inventoried and then depreciated over several years. Starting with the Service Equipment, you will have five options to choose from for the cost of the building:

Buildings have 4 or 5 year lives. Furniture and Fixtures have 20 year lives. When an item is used in the building, it will expire at the end of its useful life prior to being replaced. You can buy an item outright or acquire it by rent or lease, and then depreciate it over the several years it’s in use. Certain items like office furniture are also normally indicated on Schedule C (if owned by you) or Schedule E (if owned by a limited company or an LLC) of the IRS Form 1040 as business and charitable

Expenses. Some items, such as wire shelving, can be deducted from capital assets you place in the building to fill your needs. By limiting the use of certain items on your Schedule C or E, you can increase the depreciation allowed for each item. Most property tax deductions are also written off based on the same 5 years, however some may be written off over 10 years.

Mortgage Interest Payments

Loans for the purchase of a property and borrowings that are secured by that property are called mortgages. In the case of rental properties, the borrower will have to pay property taxes, which are recorded as mortgage interest on the loan’s host document. Therefore, you should deduct property taxes as part of your rental property expenses. You can also eliminate property taxes from your rental property taxes in the same way as you eliminate property taxes on a personal residence.

Mortgage Interest

Points & Loan Origination Fees

I’ve been very vocal about my hatred for points and their abuse. Where I’m from they are considered a gimmick to trick you into paying for something you can get for free.

This has become more of a problem with the rise of the lease cars. Many of them have been made for the sole purpose of getting you to pay for their points. If these weren’t as common I’d say that I wouldn’t have a hard time getting rid of them right now, but I don’t have that luxury.

So here are the best ways to use them.

Interest on Unsecured Loans for the Property

This is commonly misunderstood and is one of the biggest mistakes that people make when looking to acquire a rental property. This is often known as the interest on the unsecured loan.

Since you don’t put anything towards the property itself (no down payment), the tax authority will not see this as an investment but rather a debt. So this can be deducted against your rental income, which is the only income you want to claim deductions against.

This differs from renting out a property where you put money down because you can deduct the mortgage interest and real estate agent fees against the rental income.

Don’t forget to claim the interest on your HELOC if you used it to acquire the property.

Interest on Credit Cards Used for the Property

Interest on a credit card used for the down payment of the house you are renting can be deducted. Make sure you have your receipts to show the amount of the interest you paid. The interest paid that you can deduct is defined as: The interest which you paid on those cards. It may include the interest for the amount you charged, the interest charged for your balance amount, and the interest charged for the delinquency period if it exceeds one billing period. It is up to your discretion how to split the interest payment between the credits cards.

Interest on Credit Cards Used to Pay for Rent and Utilities

Interest paid on any loans used to pay for the rental expenses of the property can be deducted. Make sure that you are able to deduct the interest that you paid.

Liquidity of Advances- The money that you borrowed for down payments and fees must be repaid within a fixed time period. Therefore, the interest paid on advances cannot be deducted. But the proceeds from the advances used to purchase the property can be deducted. How the money is used will determine which part of the money is considered as dividends, since the interest cost is based on a percentage of the original loan amount.

Fees & Tax Benefits of Rental Property

Renting an apartment is one of the most economical ways to live and is the preferred medium of housing for millions of Americans. Unfortunately, renting can be more expensive in some cities than in others. In the following infographic, we’re going to look at the communities that vary the most in their rent prices throughout the United States. Since we considered only the 40 most populous cities in the United States, we chose to exclude the New York metro area, as prices there can be even more expensive than in other cities.

Property Taxes

While each state has different laws for property tax deductions, there are many tax deductions that tenants can take advantage of that are available to landlords. Tenants are responsible for property taxes, but that shouldn’t stop them from taking advantage of these tax benefits.

Below are the top twelve tax benefits that tenants can take advantage of that are available to landlords. And remember, these are only the beginning. Contact your tax advisor for more information and the specifics of deductions. You should also know that lots of your local municipalities have special rules that may vary slightly.

Licensing Fees

Depending on where you live, you may not have to pay licensing fees or business expenses when renting a single family home.

However, if you take money in exchange for temporary use of a room or area of a home that’s usually occupied by more than one family living therein, then you’ll need to pay licensing fees and pass a business occupancy tax.

For example, if you run a bed and breakfast out of your own home, you’ll need to pay licensing fees, property taxes, and business occupancy tax for the period in which you rent rooms.

Renter’s Property Taxes and Business Licensing Fees

When you rent out your property, you’ll have to pay property taxes on the rental amount. This is usually calculated in accordance with your annual mortgage payments or how much you’re going to earn on the rental property.

Usually, the amount calculated by your city is adjusted to reflect the net income after expenses. You’ll have to pay taxes on the said amount, and when you file your annual tax return, the city will deduct the taxes from the income and send the rest to you after they’ve verified it.

Occupancy Tax Deductions

Common Law in the USA stipulates that the property owner is responsible for the cost of the services performed by the renters. While common law in the 2000’s was in tune with reality 2013 is not. Thus, it has become important to rent premises to individuals, companies and even governments for some or the entire year. Because of this conduct, the occupancy tax is imposed by the State and counties over the dwellings as follows. Since the tax is against the owner, the owner may deduct the cost incurred to perform the service, the depreciation of the dwelling.

Occupancy expenses can be excluded in calculating the rental income for tax purposes.

Occupancy tax deductions include the following:

The cost of utilities to the tenant.

When heat, air conditioning, and other energy supplied by the tenant exceeds the energy supplied by the landlord.

The cost of furnishings and equipment provided by the tenant.

The cost of repairs.

The cost of furnishings and equipment provided by the tenant.

A rental property owner using the rental property to collect and deliver customers’ orders for a business will be able to deduct certain amounts paid to the tenants for the occupation of the