Being a landlord is running a business, and like any business, you have the right to deduct certain business-related expenses. There are certain operating expenses that the IRS allows landlords to deduct from their income. In order to qualify under the tax code, the operating expense must meet the following criteria:
The operating expense must be typical and necessary;
The operating expense must be current;
The operating expense must be directly related to the operation of the rental;
The amount of the operating expense must be reasonable.
Interest
Landlords can deduct interest that has been paid on money borrowed for the rental property. Most often, this means mortgage interest. It can also apply to home equity loans, credit card interest, or personal loans used to pay for improvements to the property or other expenses related to the property.
Repairs
One of the major responsibilities of a landlord is to repair and maintain the property. Repair-related expenses can end up being a large portion of your operating expenses as a landlord. Fortunately, you can deduct the full cost of a repair during the tax year the repair was made, as long as it meets the following criteria:
The repair does not add significant value to the property;
The repair does not significantly extend the life of the property or make it more useful.
Repairs that meet these criteria include things like painting or fixing the damaged portion of a floor or roof. Repairs that qualify for this type of deduction should simply restore the property to its original condition, not improve upon it.
Improvements
The cost of improvements to a property can also be deducted, but that deduction is handled differently. Instead of deducting the full amount in the year that the improvement was made, the deduction must be depreciated over a period of 27.5 years. In order to be considered an improvement, the work performed must add value to the property, prolong its life, or make it more useful.
Transportation Expenses
Being a landlord typically involves running some errands and incurring some transportation-related expenses. Expenses for local trips, like going to the bank or the rental property, can be deducted. Landlords have two options here. You can use the standard mileage rate or the actual expense method. If you use the standard mileage rate, you multiply the rate set by the IRS for the year by the number of miles driven for rental business. If you use the actual expense method, you can deduct your actual vehicle expenses in addition to depreciation.
Travel Expenses
When you need to travel out of town overnight for business related to your rental property, you can deduct certain expenses. These expenses usually include the cost of travel, hotel stay, and meals. The expenses are deductible if the travel is away from your area of principal business and the purpose of the trip was primarily for business related to the rental.
Insurance and Property Taxes
You can deduct the premiums that you pay for insurance on your rental property. This includes liability insurance as well as fire, flood, and theft coverage. In some cases, the insurance that you pay for your vehicle and home office may also be deductible. The state and local property taxes that you pay on your rental property can be deducted in the current year.
If you own a rental property in Phoenix and Scottsdale or are considering purchasing one, contact McMath Realty. We provide investment consulting, property management, rental management, property inspections, and home maintenance. We make it easy for you to own a rental property, so feel free to contact us to learn more about our services today.