Mortgage financing is a common way for real estate investors to acquire investment properties. Borrowers who derive rental income from investment properties have many important tax breaks available to them.
This article looks at some of the most common rental property tax deductions, including depreciation, mortgage interest, capital improvements, and home equity loan interest.
Rental Property Tax Deductions
Landlords can write off many expenses associated with owning and maintaining a rental property because the Internal Revenue Service treats property ownership like any other business. Common business deductions include advertising and market expenses, listing fees, supplies, utilities, home office, and travel expenses related to property ownership.
Here are five additional tax deductions directly tied to your investment property that can significantly reduce the amount you’ll owe to the IRS each year:
Depreciation: Each year, landlords can depreciate 1/39th of the costs associated with acquiring and maintaining commercial properties, while residential landlords can deduct 1/27.5th. These deductions are considered the normal wear-down of their real property assets. However, when you sell the asset you’ll have to pay this money back in the form of a depreciation recapture tax.
Property taxes: The money paid to county governments for property taxes is deductible on Schedule E of your annual tax return. These deductions also include any applicable special easement, land, or school district taxes.
Mortgage interest: The company that holds the mortgage of your financed property will send out a form 1098 at the beginning of the year. This form shows how much you’ve paid in mortgage interest, which is fully tax deductible.
Insurance premiums: Premiums from insurance policies such as homeowners, liability, flood, and hazard insurance also are fully deductible.
HELOC interest: Property owners may take out a home equity line of credit to fund large improvements to their rental properties. These capital expenditures may include a new roof, HVAC system, or repaving a parking lot for a multiplex. The interest payments on home equity loans and home equity lines of credit are tax deductible.
The Bottom Line
According to the IRS, you can deduct home equity loan interest on your investment property provided you can demonstrate you used the funds to improve or renovate the property.
If you are going to take out a home equity loan to remodel a kitchen or master bathroom, or to install a bonus room or other large capital improvement project on your rental property, be sure to keep detailed records of all expenses and work paid with home equity loan funds so you have the paperwork to satisfy any IRS audit requirements.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.