Is Rent Tax-Deductible? - The Full Guide

Paying monthly rent is an expensive reality for many Americans. Sadly, the monthly rent of your primary residence is not a deduction that you can use to lower your taxable income. Some people qualify for a renter's tax credit. However, if you have a rental payment for a business or if you own a rental property, there are some tax pros that you should know.

Also read: How to Review Your Paychecks Before Filing Income Taxes

5 Big Rental Property Tax Deductions

Investing in rental properties is a sound financial investment. A rental property creates passive income for your portfolio. You collect the rental money each month, but you must report it as taxable income.

As a landlord, you are responsible for every business expense required to maintain your property. 

The rental property offers its owners certain tax benefits where the IRS is concerned, and owners can claim certain business expenses that come with owning a rental property. There are five significant rental property tax deductions. They are:

Mortgage Interest

Most people use a mortgage to purchase a second property to earn extra money. The good news is that you can use the amount paid in mortgage interest as a deduction for your tax return.

You need to keep accurate financial records for any investment. As a landlord, you are also eligible to claim the interest on unsecured loans used for renovations or improvements to your property, and these improvements are considered a business expense.

The interest paid on credit cards used for ordinary and necessary expenses for your business is a deductible expense.

Also read: A Full Guide on How to Calculate Income Tax On A Pay Check

Property Tax

As a landlord, you must pay property taxes. The amount of these taxes will depend on where the property is located, and the amount of taxes charged will vary from state to state. Small business owners will benefit by deducting the amount of their property taxes, and they are eligible to use this deduction to lower their gross income.

There is a $10000 limit for sales and property taxes. If you are married filing separately, each spouse can deduct up to $5000 for each tax year. A married couple can benefit from this tax deduction by claiming half of the property tax.

In some states, owners of property used for short-term rental may be required to pay an occupancy tax. The occupancy tax is also known as a lodging tax. You must pay this tax for any short-term rentals. For example, if you have a vacation home that you rent out weekly, you might have to charge an occupancy tax.

In addition to the occupancy tax, you can also deduct:

• Sales tax on purchases for your rental.

• Wage and social security taxes for your employees

• Inspection fees.

Consulting with a certified public accountant is the best way to ensure which tax benefits you can claim on your tax return.

Also read: Mandatory Deductions From Your Paycheck

Insurance Premiums

Insurance is usually required when securing a mortgage for any property. Even if it is not needed, it is simply good business practice to acquire insurance for your financial protection. 

Owners of rental property can claim the insurance policy premiums paid in the tax year being filed. If you have prepaid fees for the following years, you must be careful to include them in the next years' tax claim.

If you have employees, you can also claim the premiums for health insurance and worker's compensation.

Rental Property Depreciation

Over time, your rental property will decrease in value. The normal wear and tear of everyday living will affect the value of your rental property. U.S. rental property drops in value at a rate of 3.636% each year for 27.5 years. This decrease in value is called depreciation. The IRS considers 27.5 to be a useable life for a rental property.

This depreciation takes effect as soon as your property is ready for rental. This does not mean that someone has to be paying rent, only that it is available to be rented.

Claiming the depreciation deduction for your property can be a valuable tax benefit. This tax deduction can lower your total income for decades which will offset the original cost of your property.

You can only claim the depreciation deduction for buildings and structures but not your land.

Improvements to your property would be considered a depreciation deduction. An example of one of these improvements would be replacing a roof. The cost of significant improvements or renovations can be spread over multiple years, lowering the amount of taxes that you will have to pay.

Also read: Are Moving Expenses Tax Deductible?

Repairs

To get the most from your tax return, you must understand the difference between repairs and improvements to your rental.

Improvements to your structures are expenses that you incur to restore your property. Over time, you can deduct this business expense, and these expenses qualify under the depreciation deduction.

Repairs are when you patch, mend, or fix things on your existing structure. The entire cost of repairs is deductible in the year that you make the repairs. Detailed records are essential for tax deductions concerning repairs. Invoices from independent contractors must state that they are repairing or fixing rather than replacing.

Sometimes, it is possible to make repairs, but there are times when you will have to buy new items. Fixing part of a damaged roof is an example of a repair rather than replacing the roof, which would be an improvement.

Proactive landlords can practice preventive maintenance to limit the need for repairs. Expenses for preventative maintenance are operating costs associated with owning small business property, and you can deduct these expenses from your gross income.

Other Rental Property Deductions

You are eligible for more deductions when you invest in real estate for rental. The goal is to lower your taxable income when tax return time comes around, so every deduction helps reduce the amount of money that you will owe. The more money you can deduct, the fewer taxes you will pay on your rental income.

Also read: Are Home Improvements Tax Deductible?

Deducting Utilities

As a landlord, you can deduct the cost of utilities if you are paying them and then recovering them in the tenants' rent.

Legal and Professional Fees

Managing and renting out real estate is considered a business, so your operating costs are deductible. Any professional that you hire to help with the operation of your property will fall into this category.

The fees for certified public accountants, lawyers, realtors, marketing and advertising firms would be tax-deductible.

Travel and Transportation

Your travel expenses and transportation costs are also tax-deductible. You may have to travel to several different properties for showings or collection of rent. If you are traveling to your properties to manage your business, it is best to keep accurate records for the IRS.

There are two ways to deduct travel and other expenses. You can calculate the actual expenses that you incur while traveling. Travel expenses would include a record of the mileage, fuel receipts, hotel receipts, and any other costs related to your travel. 

The second way is the more straightforward way to calculate the deduction: to use the standard cost per mile. In 2021, the typical cost was 58.5 cents per mile.

Paying Rent for Office Space

As a landlord, you are considered a business owner. You may use the home office deduction if you are working from home. If you pay rent for office space, you are able to deduct this from your taxable income.

Deducting Services on Your Tax Return

There are many services that a responsible landlord must provide for his tenants. Most of the amounts paid for these services qualify as a tax deduction because they are operating expenses involved in managing the property.

These services would be garbage removal, landscaping, pest control, and snow removal. There may be other services that qualify as a tax deduction. The best way to determine if a service you are using qualifies as a tax deduction is to consult a certified accountant.

How Can A Business Owner Use a Rental as a Tax Deduction?

Rental payments can be one of your business's most significant tax deductions, and it is also one of the most confusing tax issues for business owners. We will try to simplify a rent deduction.

You may be renting a dedicated office space or an apartment where you have your home office and conduct business activity. There are three ways to maximize the rent deduction for your rent paid for your tax return.

Home Office Deduction

The home office deduction can be used by business owners who work from their homes. Many people ask the same question, am I eligible for a home office deduction?

The office must be located in your principal residence, and there are two requirements for your work area to qualify for the home office deduction.

• The workspace has to be used specifically for business use.

• The workspace must be your principal place of business.

The regular method to calculate the amount of your home office deduction is based on the square footage of your workspace divided into the square footage of your entire household size. Once you have the percentage of your workspace, you apply this percentage to the amount of rent paid. 

You add this percentage for the entire tax year. You will enjoy a significant tax benefit simply for working from the comfort of your own home and paying rent.

The IRS allows for a simplified home office deduction for business owners that do not want to bother with the calculations and the record keeping. The simplified method allows a business owner to deduct $5 for every square foot of their dedicated workspace.

Rent an Office Space

You can use your entire rent payment as a tax deduction if you are renting an office space. You are also eligible to deduct any rental expenses associated with your office. You cannot claim the home office deduction when renting an office space.

You can also fully deduct the money you pay for a co-working space.

Short-Term Home Rental

Short-term rentals through Airbnb and VRBO can also be used as a tax deduction. Vacation rentals can be used for work much like any other home, and Freelancers can work from anywhere and often combine travelling with work.

Freelancing nomads should always keep good records for their tax returns. Records for the short-term rentals should include the money paid for the rental, the square footage of the workspace, and the square footage of the entire rental property.

You calculate this deduction the same way you calculate the home office deduction.

Here Are the States that Provide a Renter's Tax Credit 

Some states give tax credits to people over the age of 65 years old and/or people that are disabled. This is not a deduction but simply a tax credit that they can use against money owed for taxes. They will not be the same amount for each state.

• Arizona

• Colorado

• Connecticut

• Iowa

• Missouri

• Montana

• North Dakota

• Oregon

• Pennsylvania

• Rhode Island

• Utah

Other states give a renter's tax credit based on income. Each state has different methods of calculating this renter's tax credit. These tax credits make housing more affordable for many low-income households. The states that offer this tax credit are:

• California

• Hawaii

• Indiana

• Maine

• Maryland

• Massachusetts

• Michigan

• Minnesota

• New Jersey

• New York

• Vermont

• Washington

• Wisconsin

Rent can be tax-deductible in some instances. Investors who manage real estate properties for rental purposes would benefit the most from tax deductions. Business owners can also benefit from having a home office. Everyday citizens can qualify for a tax credit in certain states. The best way to maximize your tax deductions for rent is to talk to a certified accountant.

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