Do you own rental property that's been producing a marginal profit or a loss the past few years? Short of raising the rent again, you're fighting an uphill battle as your expenses continue to grow.
Strategy: Squeeze every last tax-deduction drop from your rental activities. A little extra diligence can boost your profits or turn red ink into black.
Surprisingly, many landlords don't grab all the deductions they're entitled to. Here are 10 deductions you want to secure:
1. Interest. It's usually the biggest deduction on the list, so don't forget it. 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 other property's cost through annual depreciation deductions based on the basis in the property. You must depreciate residential rental property over 27.5 years.
3. Local travel. Track auto expenses related to rental activity. This isn't limited to travel to and from the rental property. You can also deduct trips to the hardware store or the office-supply shop. Use the standard mileage rate (for 2005, 40.5 cents per mile) 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 percent of the cost of meals). Also, you can mix in a little pleasure. Take a side trip or squeeze in some golf, as long as the trip's primary purpose relates to the rental activity.
5. Repairs. Write off "ordinary and necessary" repair costs in the year in which they're incurred. Include expenses for repainting, fixing gutters and leaks, plastering and replacing broken windows. Note: Improvement costs, as opposed to repairs, must be capitalized and added to your basis (see box at right).
6. Insurance. You can deduct insurance premiums for your rental property, including fire, theft and flood insurance and landlord liability insurance. If you have regular employees, you can also write off health insurance and workers' comp insurance costs.
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 independent contractors—such as plumbers or landscapers—who provide services for your operation.
8. Professional fees. Generally, you can deduct the fees paid to professionals—attorneys, accountants, property
9. Home-office expenses. If you use a room at home for administrative tasks—and the activity has no other principal place of business—you can deduct expenses attributable to a home office. Thus, 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). The use of the home office must be regular and exclusive.
10. Casualty losses. Finally, if a sudden event damages your rental property, including vandalism or theft, you may be able to claim a casualty loss for the damage suffered (less insurance reimbursements).
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