Investing in real estate can have tax advantages. Your annual tax burden can be lessened by reporting your rental property expenses. The IRS has clear rules about what is eligible for deduction and how to report it. Deductions that qualify as improvements to the property, however, must be handled differently than other repair expenses.
Most typical real estate investment expenses can be deducted on your income tax return in the year they were incurred. You can deduct costs associated with renting the unit, such as cleaning, advertising, maintenance and travel to and from the property. Other deductible expenses include mortgage interest, hazard insurance and management fees. The total of your expenses is subtracted from your rental income, which will lessen the tax you owe, if any.
Repairs to your rental investment that do not increase the value of your property or make it last longer are tax-deductible expenses. Fixing the plumbing, the floor, a broken window or the air conditioning or heating system qualify as repairs that can be deducted in the year they are made. The IRS considers repainting the house a repair expense that does not improve the value of the property and thus it can be deducted. If you make a major or capital repair, like installing a fence around the property, you will not be able to deduct the entire amount in the year the expense was incurred.
Improvements that increase the value of your real estate investment, add to the length of its life or give it a new use cannot be completely deducted in the year you incur the expense. For example, substantially remodeling, adding a room, installing landscaping, putting on a new roof, replacing the flooring or paving a new driveway are considered improvements that depreciate over time and must be deducted accordingly.
Depreciation allows you to deduct the cost of the property over its useful life. The IRS defines this to be 27.5 years for residential rental real estate. A simple way to determine how much you can deduct for depreciation is to divide the cost of the property by 27.5. However, you may need to pro-rate the the first year's depreciation by the number of months the property was used as a rental, that is, if it was not rented for the entire year.
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