There are a number of benefits to owning investment property, and there are some downsides, as well. Among the things you have to carefully consider when you own this type of real estate are all the investment property tax deductions you may be able to take. Those can be very beneficial to you, since they can help you save big on your taxes. Sometimes investors miss out on these tax breaks because they don’t realize they can take them. At other times, the issue is that they try to take too much or they attempt to deduct something that they legally can’t get a deduction for. Since you don’t want any trouble with the IRS but you do want all the deductions you’re owed, it’s important that you understand what you can and can’t take.
1). How much interest can you deduct?
If you’re paying interest for a mortgage on your investment property, you should be able to deduct that interest. Don’t just assume that you can take off a particular amount, though. Use a tax program or work with an expert, so you get the right facts and figures into your income tax return. By making sure you deduct fairly and properly, you’ll reduce your audit risk and lower your chances of problems if you are audited. Most investors deduct the mortgage interest they pay on their investment properties, so it’s a common deduction, but it’s also important to remember that every tax situation can be different. When in doubt, consult the pros.
2). Do you pay for depreciation?
When buying a home for investment purposes, that home may or may not go up in value. Generally, though, a house doesn’t depreciate much for tax purposes. Mobile homes definitely can, though, because they don’t have the same kinds of value increases that site-built homes experience. If you’re concerned about the value of an investment property you currently have, you’ll want to look into whether depreciation is an option for your particular case and type of property. If it is, you can reduce your tax liability by taking the depreciation on the house or apartment building(s) you own, giving you the chance to pay a bit less to the IRS in April.
3). What kinds of repairs do you make?
Making repairs on the property is also important for your taxes, as are improvements. The more things you do to the property, the more you keep or add to the value and the more you may be able to write off on your taxes. Keep in mind that not every repair is the same. They are all business expenses, though, because you would not have had those costs if you were not in the business of being a landlord. Some improvements to the property may also allow you to take specific kinds of tax credits such as those for energy efficient appliances and other cost-reducing measures. Since these may not all apply to a property that isn’t your primary home, talking with your tax advisor is a good idea.
4). Do you have a home office?
If you have a home office where you take care of the day-to-day things that come with having investment property, you may be able to take the home office deduction, as well. The IRS requires that you use that area solely for business, though, so if you use the space for other things you may not be able to write it off on your taxes. The home office deduction can save you some money if you’re eligible, so it’s worth checking into in order to see if you qualify.
5). What if there’s theft on the property?
If you suffer a loss on your investment property, you may be able to write off that loss on your taxes. It’s a business loss, since it took place on property that you were renting out in the course of conducting business as a landlord. If the theft is of the renter’s items that’s technically not a loss to you, but if the theft is of appliances or other things that belong to the property and to you by extension because you own that property, those are losses that you’ll have to pay out for. Making sure to keep track of your profit and loss for your business and investment property is very important, so you don’t forget something that could help you save on your taxes.
6). Can you deduct your insurance premiums?
If you own a home and want to use it as a rental property, you can’t have standard homeowners insurance on it. You need landlord insurance, instead. The premiums for that will be a bit higher in most cases, but the difference generally isn’t that significant. Insurance for an apartment building or other multi-family dwelling can run much more, simply because of the size and the potential for loss. If you pay insurance premiums for your rental property, you should be able to deduct them on your taxes. They are another business expense, because they wouldn’t have them if you weren’t an investor.
2 Point Highlight
Since you don’t want any trouble with the IRS but you do want all the deductions you’re owed, it’s important that you understand what you can and can’t take.
If you pay insurance premiums for your rental property, you should be able to deduct them on your taxes.
