When you purchase a rental property as a real estate investment you will likely pay income tax on your earnings. However, there might be ways to lower your tax burden through deductions on a rental investment.
What is a Rental Property?
The IRS has guidelines for what is considered a rental property.
- The property must be used primarily as a rental. This means that the owner can use the residence as a personal property for no more than 14 days of the year, or more than 10% of the total days the home is rented at fair market rent rates.
- The property must be a dwelling like a condominium, single-family home, or mobile home.
Calculating Rental Income
Monthly rent is not the only income counted as income. This is not an all-inclusive list, but rental income for income tax purposes can include:
- Rent paid to you by tenants.
- Services tenants perform in turn for rent credit—for example landscaping or painting.
- Any part of a security deposit you don’t refund.
- Pre-payments of rent. For example, if a tenant pays first and last month’s rent when they move in.
Rental Property Income Tax Deductions
While rental income is considered income for tax purposes, there are deductions you might be eligible for.
The management and maintenance of a rental property might be deductible. These include:
- Property management fees
- Mortgage interest
- Insurance payments
- Advertising costs
- HOA fees
- Utilities you pay
- Maintenance of the home, but not improvements
Depreciation is another deduction from income earned from rental properties. For real estate, the depreciation is calculated over a 27.5-year period. Also, you can only claim depreciation for the building, not the land.
To claim depreciation as described above, the IRS has certain guidelines. For example, you can only deduct depreciation for the part of a property used as a rental, and you must be the owner of the property.
In order to determine taxable income from a rental property and any deductions, it is best to meet with a tax advisor to work with you line-by-line on your expenses and incoming money from the rental.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.