Do you own residential property that’s been producing a marginal profit or a loss the past few years? Short of raising the rent, you’re fighting an uphill battle as your expenses continue to grow each year.
Strategy: Mine every last deduction you can from your rental activities. A little extra diligence on your part can reduce your taxable income. You might even qualify for a deductible loss.
Surprisingly, many landlords don’t claim all the deductions they are entitled to. Here are the “top 10” deductions on the list:
1. Mortgage interest: This is usually the biggest deduction for landlords. You can deduct mortgage interest on loans to acquire or improve your rental property plus other interest incurred for assets or services used in the rental activity.
2. Depreciation: Most likely, this is the second-biggest deduction item. Recover the cost of the other property through annual depreciation deductions based on the basis in the property. Residential rental property must be depreciated over a period of 27½ years. The cost of land cannot be depreciated.
3. Local travel: Don’t forget to keep track of auto or truck expenses that are related to rental activity. This is not limited to travel to and from the rental property. You can also deduct trips to the hardware or office supply stores. For simplicity, use the standard mileage rate (for 2010, 50 cents per mile, plus tolls and parking fees) to figure your deduction.
4. Long-distance travel: If you’re required to travel overnight for your rental activity, you can deduct your air fare, lodging and other related expenses (including 50% of the cost of meals). In addition, you can mix a little pleasure in—for instance, take a side trip or go golfing—as long as the trip’s primary purpose is related to rental activity.
5. Repairs: Write off the cost of “ordinary and necessary” repairs in the year in which you incur them. These include expenses for repainting; fixing gutters and leaks; plastering; and replacing broken windows. Note: The cost of improvements, as opposed to repairs, must be capitalized and added to your basis (see box below).
6. Insurance: You can deduct insurance premiums for your rental property including fire, theft and flood insurance and landlord liability insurance. And, if you have regular employees (see No. 7), you can also write off the cost of health insurance and workers’ compensation insurance.
7. Salaries and contractor fees: When you hire someone to work for your rental activity, you can deduct his or her wages as a business expense. Similarly, you can deduct fees paid to an independent contractor (e.g., a plumber or landscaper) to provide services for your operation.
8. Professional fees: Generally, you can deduct the fees paid to professionals—attorneys, accountants, propertycompanies, investment advisors, etc.—to the extent the costs are attributable to your rental activity.
9. Home office expenses: If you use a room at home exclusively to conduct your rental property administrative tasks (and use no other fixed location for such tasks), you can deduct expenses attributable to the home office. For instance, you can deduct a percentage of regular home expenses (e.g., utilities and insurance) and the full amount of direct expenses (e.g., a separate telephone line). Caution: The use of the home office must be regular and exclusive.
10. Casualty losses: Finally, if your rental property is damaged or destroyed by a sudden event, including vandalism or theft, you may be able to claim a casualty loss for the damage suffered (minus insurance reimbursements). Note: Unlike losses to personal assets, such as your home or car, there is no 10%-of-AGI floor or $100 reduction per event for casualty losses to investment property.
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