Perhaps it's when you see that cute little bungalow next door with a "For Sale" shingle hanging outside. Maybe when you're looking at your bank statements and frowning about your own mortgage payment. Or maybe it's when you sigh with satisfaction after fixing your own leaking sink and think to yourself, "I could totally be a landlord – fix sinks all day and feel endlessly smug." Whatever the reason, many of us have had pleasant, idealistic daydreams about owning rental property. We'd just buy this nice house, get some nice people in there, and collect a nice paycheck every month!
Of course, the reality is a little less romantic. You have to pay a sizable chunk of taxes on that nice paycheck, and there are several rules about what goes where. For instance, if your tenant pays you for January rent in December, count it toward the previous year, not the next one. And don't forget to pay taxes on that last month's rent you received along with the first month's.
But it's not all about paying: While rental income is taxable, you may be surprised at how many deductions you can also take to ease your tax burden.
Let's start with some of the most common deductions. First off, remember to deduct the interest of your mortgage payment. Beyond that, deduct that interest on any credit card purchases that went toward repairing or servicing your rental. And while you can't deduct the entire cost of the property the year you buy it, you can deduct a percentage of its value over the course of a few years.
The IRS also states that a rental owner can deduct "ordinary and necessary expenses for managing, conserving and maintaining your rental property" [source: IRS]. And that, it turns out, is a bonanza of potential breaks. Need to repair a broken window? Deduct it. Cleaning costs? Deduct it. Need to advertise the space? Ditto. And don't forget that the costs of utilities are deductible as well. Even getting the lawn mowed can be added to the list.
But it doesn't end there. If you meet certain requirements, you can deduct a home office as a rental owner or the cost of professional or legal services [source: Fishman]. You can even deduct mileage for travel related to the property.
So is it a terrific idea to buy the house next door and devote every free moment of your time to either fixing the neighbor's leaky faucet or obsessing about the possibility of a leaky faucet? Maybe, maybe not. But, if you have the time, money and patience, being a rental owner can have its perks come tax season.
- Fishman, Stephen. "How Landlords Can Deduct Long-Term Assets." Nolo. 2014. (Sept. 15, 2014) http://www.nolo.com/legal-encyclopedia/how-landlords-can-deduct-long-term-assets.html
- Fishman, Stephen. "Top Ten Tax Deductions for Landlords." Nolo. 2014. (Sept. 15, 2014) http://www.nolo.com/legal-encyclopedia/top-ten-tax-deductions-landlords-29497.html
- Internal Revenue Service. "Tips on Rental Real Estate Income, Deductions and Recordkeeping." Aug. 21, 2014. (Sept. 15, 2014) http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Tips-on-Rental-Real-Estate-Income-Deductions-and-Recordkeeping
- TurboTax. "Real Estate Tax and Rental Property." Intuit. 2013. (Sept. 15, 2014) https://turbotax.intuit.com/tax-tools/tax-tips/Rental-Property/Real-Estate-Tax-and-Rental-Property/INF12039.html