5 Tax Deductibles Allowed on Rental Property
“I am confused about the tax deductibles allowed on rental properties.” This is the most common statement we hear among homeowners who earn rental income. They’re often scratching their heads whenever someone mentions the term ‘tax’. Each year, when the time for filing a tax return nears, we see hundreds of people frantically looking for the right way to file their property taxes.
Your house becomes a financial asset when you put it on the market for rent and begin to derive income from it. When you are filing your tax return, you have to declare the rental income received from your tenants. American tax laws allow homeowners certain tax deductions (write-offs) that are deducted from the total revenue earned during the year.
We have listed some of the many tax benefits that rental property owners are allowed. These will help you better understand how to calculate your tax liability.
1. Rental Property Depreciation
If a financial asset is valuable to your business in some way, expected to last more than a year, and lose its value over time, it can be depreciated. Some of the depreciable assets are improvements to the property – a kitchen cabinet or a patio, fences or shrubbery, vehicle for business use, furniture or appliance, and the purchase price of the property minus the cost of land. The method of calculating depreciation can be either straight line or accelerated depreciation. The simple one is dividing the cost of the property by its useful life – the number of years during which it will offer you benefits. You can deduct this fixed amount every year from your rental income.
2. Home Repairs
Home repairs are not deductible, but home improvements are. You might be wondering what’s the difference between the two. Home improvements are the changes that you bring to your house that increase the value of the property – for example installing solar screens or a roof, or building a patio in the backyard. These expenses are deductible, however the expenses that you incur to bring the house into a liveable condition, such as repairs, will not be deemed as home improvements.
You can deduct the amount of interest you pay on a mortgage, business loan, or credit card that you have used for business purposes, as well as car loans (if the vehicle is used for business purposes). If the vehicle is used both for business and privately, you are only allowed to deduct the amount that is used for business purposes.
4. Travel Expense
As a landowner, you can deduct any local and long distance travel expenses that you incur for business purposes – for example, traveling to your property to fix an urgent problem. This doesn’t include commuting expenses – which means you cannot deduct the cost of traveling from your home to your place of business.
5. Casualty Losses
If an unforeseeable event like a fire or an earthquake destroys your property, you are entitled to deduct the losses from your total rental income earned during the year. The amount will depend on the extent to which the property is damaged and the amount of insurance coverage you have on the property.