Are You Claiming Every Possible Tax Deduction on Your Rental?

Putting money into real estate is always a good idea.  You have real assets, some idle income, and a key part of many plans to get rich.  When tax time comes around, though, your pride might give way to a lot of stress.  Let's say that as you look through your records and spreadsheets, a question that makes you feel bad comes up.  Do I have money to give away?  Most of the time, the owner in real estate would be very sad to say yes.  Most people don't know how deep tax deductions go, so missing out on them is like giving the people who own your land your hard-earned money.

 But this isn't about getting around the law; it's about seeing the legal fees you have to pay as business costs, since that's what you are.  The tax code lets you write off normal and necessary costs that come with running your rented property as a business.  Take a look behind the scenes with me to find some very strong adjustments that are often missed but could really hurt your bottom line.

Beyond the Basics: The Big-Ticket Items

Right away, the bigger conclusions come to mind.  Mortgage interest is usually the biggest cost that a real estate investor can deduct. It looks like you are claiming that.  On the other hand, property taxes are easy to understand and can be very high at times.  The other is insurance. You can deduct the full amount of your landlord, hazard, and flood insurance premiums as costs you had to pay to keep your property safe.

 It's clear that these things are important, but you should still use them to check your results.  When you make payments on your mortgage, do you clearly separate the principle and interest owed?  Do you count all the different types of property tax you paid this year?  These basic benefits are the building blocks of your tax plan, and the best way to get the most out of them is to keep good records.  If you get these right, you'll be ready for anything else.

The Power of Pennies: Small Expenses with a Big Impact

And this is where a lot of buyers lose money.  For an investor, it's easy to keep track of their mortgage payment, but what about the sheet of paper they bought to print a new lease?  Or the number of miles you drive to get a new smoke detector?  Small costs may not seem important to an investor at the time, but they can add up to a big tax break over the course of a year.

 What about all the other costs you have to pay?  Could be costs for advertising to find renters, like "For Rent" signs or fees for putting the property online.  That's also possible. For example, you might pay your lawyer to write up a lease or your accountant to do your taxes.  After that, your renting account has bank fees, those are deductible as well.  You need to find a way to keep track of these business pennies.  A simple spreadsheet or app made just for this can help you keep track of dozens of small costs that you may have forgotten about. Suddenly, they add up to hundreds or even thousands of dollars that you can legally deduct.

Repair or Improve? Knowing the Difference for Your Taxes

One of the most common disagreements between landlords and tenants is the difference between a repair and an improvement. Many of these cases can have serious tax effects if they are viewed incorrectly.  In simple words, a repair is something you do to keep your property in good shape. An improvement, on the other hand, raises its value, makes it suitable for a new purpose, or extends its life.

A broken pipe under your kitchen sink is one example of something that needs to be fixed.  It's an ordinary cost that you can deduct in the same year you paid the plumber because it was a repair.  One thing that makes the kitchen better is putting in granite countertops, custom cabinets, and high-quality tools.  The cost of an improvement is capitalised instead of being deducted right away. It is then depreciated over the useful life of the improvement, with a reduction of the same amount every year.  This needs to be done right if you want to file your taxes correctly and plan your finances ahead of time.

Your Biggest Deduction Might Be One You Can't See: Depreciation

While we're on the subject of depreciation, let's talk about the quiet giant of rental property deductions.  You don't have to use money this year to claim depreciation because it's a non-cash expense.  In short, it's a tax idea that lets you write off some of the costs of building your home over the course of its expected useful life, which for most homes is 27.5 years.  To put it another way, depreciation is money paid to a building for the damage it takes over time.

 Remember that you can only discount the building and not the land it's on.  The big difference between an asset that is appreciating (land) and an asset that is declining (structure) shows that this is one of the few golden rules in investment property accounting.  When it comes to investing, most people don't like doing the math, but you can't ignore a deduction like this one.  This is one of the best tax benefits of having a home and will help a lot to lower your taxable rental income every year.

Don't Forget the Beginning: Costs from Your Purchase

This means that the deductions begin as soon as the property is bought, not just when a renter moves in.  You can't deduct the price you paid for the house, but most of the closing costs and expert fees aren't lost; they're added to your "cost basis," which is the government's term for how much the property was worth.  As the cost base goes up, his capital gains tax liability goes down, which is good for him when he finally sells the house.

 Remember what happened when you bought something; did you hire professionals?  You can often add to this cost basis the fees you paid to inspectors, lawyers, or specialised buyers agents who helped you find the deal and discuss the price.  Keeping close track of these early costs is like making a tax prediction that will help the owner in the long run.  It is, in fact, a great plan.

Take Control of Your Tax Story

As a smart property investor, you need to do more than pick the right home and tenants.  Your business needs to be smart and work well.  One example of this is getting the biggest tax breaks.  As a homeowner, you need to change your mindset to that of a businessman who meticulously records costs, knows the rules by heart, and makes plans ahead of time.

 You will never pay one dollar more in taxes than you have to if you think about big-ticket items, keep track of small costs, know the difference between repairs and improvements, and use as many non-cash deductions as possible, like depreciation.