What to Know About Rental Property Tax Deductions

Jul 31, 2023 | By ES Property Management

If you own rental properties, you probably already know they are great for bringing in passive income. Of course, there are also a significant number of expenses that come with property investment and ownership. It's important to factor in those costs when deciding whether being a landlord is right for you.

Fortunately, understanding and planning for the tax benefits of rental property can help you offset costs and continue to make money on your investments. Here are four steps we recommend you take as a property owner regarding tax deductions when managing your rental properties.

1. Report All Rental Property Income

The IRS wants to ensure rental property owners understand that all rental income must be reported. It's income, just like the money from a job or other types of investments. However, by reporting that rental income, you also create more opportunities for the rental property tax deductions you can take. 

Some of those deductions can be significant, and it's worth taking the time to discover which deductions you can take for your properties and how they'll benefit you. 

Additionally, rental property owners should look into whether certain upgrades or changes to their properties will result in more significant deductions for even bigger value.

2. Make Sure You're Deducting the Right Expenses

It would be nice to be able to deduct every dime you put into the property to increase your profit and ROI. Unfortunately, having rental properties doesn't work that way, and deducting every cost or expense can be a mistake that gets you into trouble. 

There are a few specific categories of rental property expenses that allow you can take some deductions, including:

  • Operating Expenses

  • Property Taxes

  • Mortgage Interest

  • Depreciation

  • Repairs

However, you can only deduct some of these categories and typically can't deduct anything outside of them. An excited man reads a document, rental property tax deductions concept

If you're not sure which deductions are appropriate vs. the expenses you shouldn't deduct, working with an Indianapolis property management company can help. Experienced property managers can help you track expenses and make the most of your possible deductions.

3. Know What You Can Deduct From Each Category

When you have help tracking all the financial aspects of your investment properties, it becomes easier to claim all the rental property tax deductions you deserve and qualify for. 

Whether you do your own taxes or hand them off to an accountant, work with them to understand how to deduct expenses from each category safely. 

1. Operating Expenses

Operating expenses include professional and legal fees, utilities, insurance premiums, and transportation and travel costs. It's important to ensure that any expenses you deduct are legal, or you might have to amend your tax return or pay additional taxes.

The good news about operating expenses is that there are many of them, so they can add up to a lot, even if each is relatively small. When you deduct everything legally possible from your rental properties, you can potentially save a lot of money.

2. Property Taxes

Property taxes are another one of the tax benefits of rental property. 

This could be a significant deduction, especially if you have multiple properties or your properties are in a location where taxes are high. Ensuring you're including property taxes in your expenses can be very helpful in improving your ROI and lowering your expenses.

3. Mortgage Interest

Not all property owners have mortgages, but many of them do. 

If you're buying your first rental property or trying to grow your portfolio and add more properties, you likely have at least one mortgage. Pay close attention to how much interest you're paying, as it is also a deduction.

4. Depreciation

Properties depreciate, and so do the improvements you make to them. 

Keeping careful records helps you track all that depreciation, so you can use it to reduce your tax burden. The goal is to pay as little as possible in taxes by finding all the legal deductions you can take on your rental properties.

5. Repairs

You can deduct the money you spend maintaining your rental property because it's a necessary business expense. To get the most out of this write-off, be sure to keep all invoices and receipts related to any repairs you perform or have done.

However, it's crucial to understand the difference between "repairs" vs. "upgrades." Improvements to the property are not often tax deductible. 

4. Property Management Fees are Also Deductible

Ordinary and necessary expenses can be deducted, including property management fees! When working with a property management company in Indianapolis, the costs of their services fall under "professional services" and be classified as a business expense.A couple talks with a property manager, Indianapolis property management company concept

So, if you've been struggling with any aspect of operating your rental properties profitably — but you've chosen not to enlist the help of a property manager because of the fees — you now have a good reason to consider professional management! It's tax-deductible. 

The Tax Benefits of Rental Property Can Offset Property Management Costs

While property management companies allow you to benefit from passive income and avoid the everyday details of your investment properties, it's no secret that hiring one costs money. It may seem worth it, but it's hard to decide whether or take advantage of their expertise right when money is tight. 

However, when you apply the knowledge from this blog and optimize the tax benefits of rental properties, you can offset many of the costs required to operate properties successfully. 

If you need assistance finding every possible deduction to increase your profits, ES Property Management is here to help. Our risk-based property management services help investors maximize revenue with less risk! Reach out to our team to learn more. 

We also hope you'll download a free copy of our resource, "The Guide to Finding the Best Property Manager in Indianapolis."

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