Time for Rental Property Owners to prepare for next year’s income tax return
With the end of the 2016 income tax filing season, it seems a good time to review two tax tips for rental property owners where there is partial personal use or not personal use of an owned dwelling.
This post will address which expenses are deductible. The next post will address the difference between repairs and improvements and how the different ways each can affect your income tax return.
What are deductible rental property expenses?
Certain rental property expenses can be deducted from your rental property income to determine your profit or loss for a given tax year. Some of the expenses you can deduct in the tax year you pay them are:
- Mortgage interest
- Real estate taxes
- Property insurance
- Cleaning and maintenance costs
- Supplies (For example, garbage bags, brooms and mops used only to maintain the rental property. No fair bringing your broom from home to take care of the rental property)
- Pest control
- Lawn care and landscaping
- Repairs, including the cost of labor
- Credit and employment checks for tenants
- Management fees if you use the services of an outside property manager
- Legal or professional fees
- Travel expenses (Keep records of automobile mileage, and taxi, train, and bus fees for all of those trips to Home Depot or to your local hardware or plumbing supply stores)
- Advertising (The cost of placing ads for rental apartments in local papers)
- Utilities (National Grid, Consolidated Edison, New York City Water and Sewer, and payments made to your oil company.
Why you need a separate checking account for your rental property
Owning a rental property is completely different from owning a one-family home. To make sure your experience as a rental property owner is a profitable one, get a separate checking account which you will use only for all of your rental property income and expenses. This account will accomplish two important tasks:
- All income and expenses for the rental property will flow into and from this separate account, making it easier for you to track what you spend to maintain the property and the income you’re receiving. This is easier than trying to remember if a certain Home Depot entry was for the book-case in your living room, or a new ladder for your rental property.
- Once all the income and expense information for your rental property is in one place, gathering the information necessary to prepare your income taxes is much simpler. Since the 75 days of income tax preparation season are not the time to finally try to make sense of your financial life for the past year, I give a small discount to those clients who come in with all of their expenses on one or two pieces of paper.. If I must do client recordkeeping, the client will pay a premium for the extra time and energy I must expend to complete their return.
The costs of maintaining your one-family personal home are not deductible.
It’s important to know how the owners of a one-family dwelling they personally occupy are limited about how certain expenses affect their personal income tax return. With a one-family home, you can only itemize your mortgage interest, and real estate taxes. It is imperative to keep records of any improvements made to the house as this will increase the basis when the house is sold, resulting in a lower possible tax bill.
You can find more about this subject in Publication 527 on the Internal Revenue Services website, https://www.irs.gov/pub/irs-pdf/p527.pdf .