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Owning a property is not just about having a roof over your head or a place to call home. It's also about making smart financial decisions that can help you save money in the long run. One of the ways you can do this is by taking advantage of tax deductions. In this comprehensive guide, we will explore the top 19 tax deductions that property owners can benefit from.
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Before we delve into the specific tax deductions, it's crucial to understand what a tax deduction is. A tax deduction is a reduction in tax obligation from a taxpayer's gross income. It can be potentially claimed for various types of expenses incurred throughout the year. For property owners, these deductions can come from costs related to owning, purchasing, and maintaining a property.
It's important to note that tax laws vary from one location to another. Therefore, it's always advisable to consult with a tax professional or a certified public accountant to understand which deductions apply to your situation.
Now that we have a basic understanding of tax deductions, let's dive into the top 19 tax deductions that property owners can take advantage of.
Mortgage interest is one of the most common tax deductions for property owners. If you have a mortgage on your property, the interest you pay on your mortgage is tax-deductible. However, there are certain limitations to this deduction, so it's important to consult with a tax professional.
Mortgage interest remains a crucial deduction for property owners. The IRS allows homeowners to deduct interest on up to $750,000 of mortgage debt ($1 million if the loan originated before December 15, 2017). This deduction is particularly beneficial in the initial years of a mortgage when interest comprises a large portion of each payment. Remember, this deduction is only applicable if you itemize your taxes.
The mortgage interest deduction can be a significant tax saving for property owners, especially in the early years of the mortgage when the majority of your mortgage payment is going towards interest. Read up on IRS Publication 936 to learn more
Property taxes are another common tax deduction for property owners. Property taxes paid on your primary residence, vacation homes, and undeveloped land can be deducted, but remember the total deduction for state and local taxes (SALT), including income and property taxes, cannot exceed $10,000 annually. This cap can significantly affect those in higher-tax states.
It's important to keep a record of your property tax payments for tax purposes. If you pay your property taxes through an escrow account, you should receive an annual statement from your mortgage company that shows the amount of property taxes paid.
If you use part of your home exclusively for conducting business, you may be able to deduct expenses related to that part of your home. This is known as the home office deduction. Expenses that can be deducted include the business portion of real estate taxes, mortgage interest, rent, utilities, insurance, depreciation, painting, and repairs.
Calculations can be done using the simplified option (a standard deduction of $5 per square foot of home used for business, up to 300 square feet) or the regular method (calculating actual home expenses proportionate to the space used for business). There are specific more rules and requirements for the home office deduction, so it's important to consult with a tax professional to ensure you qualify.
If you rent out a property, you can deduct rental expenses from your rental income. Virtually all expenses necessary to manage, conserve, or maintain rental property can be deducted.
This includes not just mortgage interest and taxes but also advertising, insurance premiums, maintenance, and utilities if not reimbursed by tenants. It's important to note that rental expenses can only be deducted in the year they are paid, and you must keep accurate records of these expenses.
Depreciation is a tax deduction that allows property owners to recover the cost of an income-producing property through yearly tax deductions. This is applicable for rental properties and not for personal residences.
Depreciation is calculated based on the useful life of the property, which is currently 27.5 years for residential property and 39 years for commercial property. This means you can deduct a portion of the cost of the property each year over its useful life.
If you make certain energy-efficient improvements to your property, you may be eligible for a tax credit. These improvements include things like solar panels, energy-efficient windows, and certain types of insulation.
You can claim a maximum annual credit of $1,200 for energy property and certain home improvements. It includes limits for doors, windows, and home energy audits. For heat pumps, biomass stoves, or boilers, the yearly maximum is $2,000. There's no limit to the overall credit you can claim. You can keep claiming the maximum each year for eligible improvements until 2033.
However, this credit is nonrefundable. So, you can't receive more than what you owe in taxes, nor can excess credit be used for future tax years.
It's important to note that this is a tax credit, not a deduction. This means it reduces your tax bill on a dollar-for-dollar basis, rather than just reducing your taxable income We understand this article is about deductions, not credits, but it would be too important of a tax reducing strategy to skip!
For more information, please check out the IRS's Energy Efficient Home Improvement Credit
If you have a rental property, you can deduct the cost of your insurance premiums. This includes coverage for damage from disasters and accidents, as well as liability insurance. This does not include your homeowners insurance premium as a personal residence.
Repairs and maintenance expenses for rental properties are tax-deductible. This includes anything that keeps your property in good working condition, such as fixing a broken window or painting a room.
These are defined as any necessary expenses that keep the property in good operating condition and do not materially add value to the property. Improvements or renovations that add value to the property are not considered repairs and must be depreciated over time.
Examples of improvements, provided by the IRS, which would not qualify
If you have a rental property, you can deduct travel expenses related to your rental activity. You can deduct the normal travel expenses if you are away from home. The main purpose of the trip must be to collect rent or to manage, conserve, or maintain your rental property. You must divide your expenses between rental and nonrental activities. You can’t deduct the cost of traveling away from home if the primary purpose of the trip is to improve the property.
Expenses for local travel related to rental activities can be deducted. The IRS states the activities are "collect rental income or to manage, conserve, or maintain your rental property." If you use your personal car, truck, or van you can deduct these expenses using two methods, the standard mileage rate or the actual expenses method.
The IRS mileage rate is a set rate for car use. It helps people claim deductions for business, charity, medical, or moving trips. For 2024, different rates apply to cars, vans, and trucks. These rates are based on inflation and vehicle costs like insurance, fuel, and maintenance.
Taxpayers must keep a log of their trips for these activities. They need dates, destinations, purposes, and miles. This log is crucial for IRS audits. Also, they must choose between the standard rate and actual expenses the first year a vehicle is used for business. This choice is usually permanent. Most people prefer the standard rate for its simplicity. However, it might not offer the highest deduction compared to actual expenses, depending on their vehicle use and costs.
The "actual expenses" method is an IRS alternative to the standard mileage rate. Taxpayers can choose it to deduct business, charity, medical, or moving vehicle costs. Unlike the standard rate, this method requires detailed expense records. These include gas, oil, repairs, depreciation, and more.
Opting for actual expenses demands careful record-keeping. Taxpayers must save receipts and separate personal from business use. It's ideal for those with high vehicle costs. However, if you choose this method for a leased business vehicle, you must stick with it for the whole lease. Business owners and the self-employed can benefit, especially if the vehicle is mostly for business.
But, daily commutes are not deductible, unless your home is your main office.
You can deduct fees for legal and professional services that are necessary for your rental activity. Fees paid for professional services related to rental activity, such as legal advice, property management, and accounting, are deductible. These services must be ordinary and necessary to the operation of the rental business.
Losses from casualty (damage caused by sudden events like storms or fires) and theft can be deductible if they are not covered by insurance. The amount deductible is generally the lesser of the adjusted basis of your property or the decrease in fair market value due to the damage, minus any insurance reimbursements.
If you sell a property, you can deduct selling costs, in the year that the property is sold. These include costs such as commissions, splits, legal fees, advertising fees, etc. These are subtracted from the sale price to determine the capital gain or loss on the sale of the property.
However, these costs can only be deducted in the year the property is sold.
The term "points" refers to charges paid by a borrower for a loan or mortgage. These charges include loan origination fees and premium charges. Points are essentially interest on the loan. They cannot be fully deducted in the year paid. Instead, the deduction is spread over the loan's term. If you paid points to get a better rate on your mortgage, you may be able to deduct these points from your taxable income. There are specific IRS rules governing the deduction of points, so it's important to consult with a tax professional to ensure proper handling on your tax returns.
If you pay private mortgage insurance (PMI) on your mortgage, you may be able to deduct these payments. However, this deduction is phased out for higher income earners. For those who put down less than 20% on a home purchase, PMI is often required. The cost of PMI can be deductible based on the taxpayer’s adjusted gross income, with phaseouts starting at $50,000 for married filing separately and $100,000 for all other taxpayers.
If you have a home equity loan or line of credit, you may be able to deduct the interest paid on these loans. However, the loan must be used to buy, build, or substantially improve the property that secures the loan. There are specific rules and limitations for this deduction, so it's important to consult with a tax professional.
Advertising rental properties is key for attracting tenants. It involves costs to promote on platforms like online ads, newspapers, and real estate listings, as well as on-site signs. These costs vary by location and property type. Effective advertising not only speeds up finding tenants but also increases rental rates. Taxpayers must ensure the expenses are only for business and keep receipts for tax purposes.
If you own rental property, you can deduct the cost of utilities that you provide to your tenants. This includes electricity, gas, water, heating, and garbage collection. These are considered necessary expenses for maintaining the rental property and are deductible regardless of whether they are included in the rent or billed separately. If utilities are included in the rental charges, the total amount is still deductible; however, if the tenant reimburses these utility expenses, then the reimbursed amount should not be counted as an expense. It’s important to keep detailed records, including bills and receipts, to substantiate these deductions during the tax filing process.
Property owners can fully deduct commissions paid to managers or agents. These cover services like management, finding tenants, and negotiating leases. Payments are usually a percentage of the rental income. This varies based on services and agreements. It's important to document these payments. This allows for accurate tax deductions. The deduction is significant. It helps those managing many properties or high-value ones.
As you can see, there are numerous tax deductions available to property owners. By taking advantage of these deductions, you can significantly reduce your tax liability and increase your overall return on investment.
However, tax laws are complex and constantly changing. Therefore, it's always advisable to consult with a tax professional to ensure you are taking advantage of all the deductions available to you and to ensure you are in compliance with all tax laws.
Brad Thibeau is the Head of Partnerships at Everlance, and has held that role since 2021, with a focus on helping self employed people save time and money on their taxes.
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