If there's one thing that's always certain, is taxes, as half of that famous old adage goes.
Come January 1st through April 15th of every year, you can always count on having to pay Uncle Sam.
But if you've been considering buying a vacation property as income property, it can be a great investment, especially if it's near the beach and you can deduct much of your expenses during tax time.
The Internal Revenue Service permits landlords to deduct a large majority of the money they make and spend on rental properties whether they own a beach house or a condo.
If you're considering investing, here's how to maximize the return on your investment nest egg.
Top Tax Tips for Rental Properties
The government categorizes expenses into two groups for rental properties: capital expenses and current expenses.
Capital expenses
Capital expenses or "improvements" are any expenses that raise your property value. They can also extend the life of your property's value.
They should be capitalized as well as depreciated over several years. You can consider anything that needs to be replaced as a capital expense.
Anything that increases the value of the property, or extends its life, is categorized as a "capital expense" or "improvement" and must be capitalized and depreciated over multiple years.
Current expenses
On the other hand, current expenses for rental properties are expenses that are "one-time" items that make your property habitable and keep it in a good working condition in order to operate your rental property.
Owners of rental properties can deduct these expenses from their taxes the same year they pay for it. For repairs, though, they would need to restore a piece of equipment or item to its prior condition of quality.
Here's how you can qualify for a current expense: For an expense to be qualified, the IRS must deem it as ordinary and necessary.
Ordinary Expenses
Ordinary expenses for rental properties must be common items that are regularly accepted and used for a rental property business.
Some examples of rental properties that are deemed acceptable include interest on your rental property, maintenance costs, home insurance, utilities and advertising expenses.
Current expenses must be current with less long-term value than short-term value. For instance, repairing a hot water heater is considered as having short-term value.
But replacing the entire hot water heater would be considered as having long-term value and would not be considered as current.
The item needs to relate to your rental properties and related to your business. The amount you pay for fixing the item must be a reasonable amount of money for what the item costs in stores.
Don't claim you paid $800.00 for a toilet seat or the IRS will surely audit you.
Tax Deductions Overview
Now that you know the differences between current expenses and capital expenses for rental properties, let's look at the top tax deductions for rental property owners.
But first realize that before you claim these items as tax deductions, maintain organized records, keep purchase order receipts.
It's also a good idea to have rental property automation software application or a program like Excel or QuickBooks to track your expenses.
Track Your Expenses
It's a good idea to track the expenses for your rental properties while you make them avoid getting overwhelmed when tax time rolls around.
If you own a multiple unit rental property or several properties, you probably have a property management company that takes care of the details for you. But it's always a good idea to review their records in advance.
One thing you can count on for sure, the IRS will examine these deductions with a fine-toothed comb. So have all your paperwork in order.
A caveat: If you get audited, the IRS will charge you the full amount of the expense with interest if you fail to present them with the appropriate receipts and can't show the validity of each expense for your rental business.
Here are the expenses you can deduct.
1. Loan Interest and Buy-down Points
Do you have a mortgage on one of your properties? If you do, you can claim the interest on the loan from your rental property.
This is often the biggest deductible expense for landlords. If you paid buy-down points when you refinanced your mortgage or purchased your rental property, you can deduct that amount as well.
Here are additional deductions about rental properties related to your mortgage:
· Primary and secondary mortgage interest
· Credit card interest for items bought for your rental property
· Mortgage points to refinance or purchase a rental property
· HELOC interest for loans spent on improving or repairing your rental property
Take note: you can only deduct interest from the money you have already spent on your income property. You cannot deduct the interest from a line of credit withdrawn that is in your bank account.
2. Utilities
Landlords can deduct the utilities from their rental property that they pay even if the tenants pay some of the expenses.
You can claim the utility expenses the tenants reimburse you for. However, you must claim the utility reimbursement as income.
Here are some of the utilities you can claim:
· Electricity
· Water & Sewer
· Heating Oil
· Gas
· Trash Removal
· Recycling
3. Depreciation of assets
The government allows owners of rental properties to deduct three types of costs to depreciate and capitalize.
First, the structure value, but not the land value.
Second, the value of improvements on the property such as new windows, countertops, carpeting, flooring, appliances, and countertops.
Third includes equipment such as computers and peripherals.
These deductions cannot be deducted in full for one year. For example, if the life of a computer is three years. The first year you can deduct one-third of the cost and the same the following two years.
Otherwise, landlords could claim $50,000 in repairs in one year and sell the rental property the following year without assuming tax liability. They would gain a larger return on their investment for which some might not feel they deserve.
4. Repair Deductions
The IRS allows you to deduct the money you spend on repairs on your rental property investment. They classify repairs as your cost to maintain the current condition of an asset or rental property.
Items that you can deduct are below:
· Plumbing Repairs
· Labor Costs
· Contractor Expenses
· Repairing of Fixtures
· Air Conditioning Repair
· Exterior or Interior Painting For Your Property
· Repairing of Property Fixtures
· Renting Tools or Equipment Fees
· Miscellaneous items paid for repairs
5. Maintenance Costs
Owners of rental properties often confuse maintenance costs with repair expenses. With maintenance costs, you're not repairing anything. You are maintaining the upkeep of your rental property.
Mowing your lawn is a good example. You cut the grass weekly to maintain your lawn. Perhaps you also do weeding and tree trimming.
But it doesn't have to be fixed like a broken appliance. That's what makes it different from repair. So when you file your taxes, make sure to put lawn maintenance under maintenance.
Pest control also falls under maintenance expenses. You hire a pest control company every few months, or perhaps monthly to prevent insect infestations even when insects are no longer present. this makes it a maintenance cost.
You can deduct the following maintenance expenses on your taxes:
· Homeowner Maintenance Fees
· Pool Cleaning, Chemical Testing, and Maintenance
· Landscaping and Tree Trimming
· Pest Control and Prevention Treatment
· Battery Replacement for Smoke Detector
· HVAC Replacement Filters
· Replacement of Light Bulbs
· Lawn Mower and Leaf Blower Maintenance
· Chain Saws and Tools Used for the Property
· Janitorial Items
6. Taxes
Mortgage companies typically pay real estate taxes. Your bank will send you the 1098 form to use for filing taxes.
If you've paid off your mortgage or bought your property for cash, you can still deduct the taxes you paid the previous year.
Make sure to keep your receipts of tax payments. But if you lost your tax payments, you can find your payment record online.
Other deductions include personal property taxes, permit fees and wage taxes related to your rental property.
The IRS allows the following tax deductions:
· Personal Property Tax/Vehicle Tax
· Permit Fees/Inspection Fees
· State, County and City Taxes
· Medicare and Unemployment Taxes for Employees
· Social Security Taxes for Employees
7. Insurance premiums
Did you know that all your rental property insurance premiums are tax-deductible? If you bought insurance for your income property, you can deduct your premium payments. Some of the things you can deduct include umbrella policies used for a business expense.
You may deduct these insurance premiums:
· Homeowners Insurance
· Mortgage Insurance Premiums
· Theft Insurance
· Fire/Damage/Liability Insurance
· Flood Insurance Riders
· General Liability Insurance
· Workers' Compensation Insurance
· Personal Umbrella Insurance
8. Travel expenses
About half of landlords live away from their rental properties. If you need to travel a long distance to tend to your rental property business or check up on your assets, you can deduct that as a business expense.
You may deduct the fare for your airline tickets. You can also deduct the fare used for car rentals and taxicabs.
You may also write off the hotel stays and half of the meals you purchased as expenses during your long distance travel business. Keep in mind, you need to save these receipts in the account of an IRS audit.
9. Vehicles
If you use vehicles for your business you can deduct that asset. But you need to depreciate the expense over the life of the vehicles.
You can deduct the maintenance you paid for the vehicle during the year you maintained the vehicles.
As of the year 2013, the government allows you to deduct actual expenses or use a standard mileage rate of 56.5 cents you drive per business mile.
So you can deduct business vehicles at a depreciable rate per year and also deduct mileage and the maintenance costs for using your personal or business vehicles to conduct business related to your vacation property.
10. Advertising
The federal government allows you to deduct your advertising costs from your taxes such as these:
· Newspaper, Radio and Television Advertisements
· Banners and Signs Advertising Your Business
· Telephone Book Advertisements
· Direct Mail Advertisements (This includes postage and printing costs)
· Phone Book Advertising
· Photography and Videography Specialists Hired to Film/Photograph Your Property
11. Property Management Company Fees
Landlords sometimes need help managing their rental properties, especially when they live a long distance from their buildings. Or when they own multiple properties.
Landlords may write off expenses for a variety of management duties.
· On-site Managers
· Property Management Companies
· Individual Property Managers
· Condominium Association Fees
· Property Management Software Portal Applications
12. Office Operating expenses
When you rent a commercial office space to do business the office can be used as a tax deduction. Some people who use their home/office to conduct business may also deduct some of their deductions. But home/office deductions can be tricky.
There needs to be a designated office used for business that isn't used for any other purpose. Claiming your home as a deduction are one of the red flags the IRS audits, so be careful to follow the rules.
Office expenses you can deduct:
· Phone Bills
· Printer Paper and Ink
· Staples, post-it notes
· Business Automation Software
· Legal Forms
· Rent Paid for Office Space
13. Legal and professional fees
You can deduct the commission you pay your real estate agent you pay out to hire accountants, lawyers, tax professionals. You can also deduct court and filing fees if you file evictions for a tenant.
You can deduct the fees you pay for these items and services:
· Professional Tax Preparation
· Legal Fees
· Lease Review and Editing
· Tax Preparation Software (like TurboTax)
· Structural Engineering and Consulting
· Court Filing Fees
Final Words on the Top Tax Deductions for Rental Properties
Legal disclaimer is we are not accountants and we are not attorneys and we are not giving accounting or legal advise. But we are real estate experts and we want you to be knowledgeable and help you avoid the pitfalls that are costly.
Now you know the top tax deductions for rental properties. You've learned the difference between current and capital deductions and how you can use these tips to keep more money in your pocket.
Why not own a vacation property during the winter and earn incoming from it the rest of the year!
Our real estate agency connects buyers with sellers in the Myrtle Beach area. Check out our website for some beautiful properties, read the market reports and enjoy some great content on our blog.
Visit our website and make this popular tourist destination wrapped in the warmth of southern charm your vacation home and a smart investment.