Often, tax deductions can make the difference between losing money and earning a profit on a rental property. Here are the top tax deductions for owners of small residential rental property.
1. Interest – Interest is often a landlord’s single biggest deductible expense. Landlords can deduct mortgage interest payments on loans used to acquire or improve rental property.
2. Insurance – You can deduct the premiums you pay for almost any insurance for your rental activity. This includes fire, theft, and flood insurance for rental property, as well as landlord liability insurance.
3. Repairs – The cost of repairs to rental property (provided the repairs are ordinary, necessary, and reasonable in amount) are fully deductible in the year in which they are incurred. This includes repainting, fixing roofs, floors, leaks, broken windows, etc.
4. Depreciation – The actual cost of a house, apartment building, or other rental property is not fully deductible in the year in which you pay for it. Instead, landlords get back the cost of real estate through depreciation. This involves deducting a portion of the cost of the property over several years. For residential property it is over a period of 27.5 years. Commercial property is depreciated over 39 years.
5. Legal/Professional Services – You can deduct fees that you pay to attorneys, accountants, property management companies, real estate investment advisors, and other professionals. You can deduct these fees as operating expenses as long as the fees are paid for work related to your rental activity.