Writing off expenses is a good way to reduce your income tax burden. When you have legitimate deductions due to owning an investment property, claiming the maximum amount allowed may minimize what you owe the government each year. Owning an investment property can be time-consuming and challenging, but it provides most landlords with tax benefits.
Income tax write-offs are expenses that you deduct from your income in order to decrease the amount of tax you owe the Internal Revenue Service at the end of the calendar year. Depending on the expense, you can write off a portion of it or the entire amount. The IRS has specific instructions about what you can and cannot deduct as an investment property expense. For example, you may write off a home office if you use the space primarily for business only. Therefore, read the publications carefully and consult a tax accountant before you submit your return to the IRS. The amount of time your accountant spends completing the IRS rental tax form also is deductible.
Normally, you should write off expenses on your investment property in the calendar year that you incur them. The money you pay to repair, rent out or tend to your rental are, generally, tax deductible. Your total amount of expenses are subtracted from the rents you earned. Both income and expenses are reported on Form 1040 Schedule E. Some legitimately deductible costs include repairs made to the investment property and your travel expenses to make them, advertising a vacancy, hazard insurance, property taxes, management fees and regular upkeep.
Depreciation is used to write off the cost of the investment property over a long period of time. Although not the only way to compute your deduction, a common method is to depreciate your non-commercial rental real estate over 27.5 years. Therefore, a basic calculation of the amount to deduct is the cost of your property divided by 27.5, except for the first year, which may involve a prorated amount. However, other variables may be involved, such as the year you started using the property as a rental.
The interest that you paid on your mortgage is tax deductible in the year that you paid it. Your lender should send you a Form 1098, which may be included in your January mortgage statement, that specifies the amount of interest you can write off. Also, acquiring property comes with its own set of costs and expenses. The settlement statement, or HUD-1, given to you at the close of the transaction, details the amount of your expenses to purchase a property. Some of the costs of your loan, such as origination points, must be spread out over the expected term of the mortgage.
- 1031 Investment Opportunities: Introduction to Tax Write-Offs and Credits
- Nolo; Top Ten Tax Deductions for Landlords; Stephen Fishman
- Internal Revenue Service: Publication 527--Residential Rental Property
- TurboTax; Real Estate Tax and Rental Property; 2010
- Internal Revenue Service: Instructions for Form 4562
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