Important Rental Property Tax Deductions in 2023
When you own rental property, you’re probably already thinking about ways to minimize your tax liability. After all, as a property owner, your first priority is likely to be protecting your investment. But while you’re doing that, you might as well take advantage of any tax deductions you can. And what better way to do that than with a list of some of the top tax deductions you can take for your rental property? Read on for more information about each of these tax benefits, and how they can help you save money on taxes.
1. Depreciation Allowance
One of the best tax deductions you can take for your rental property is depreciation. This is an allowance you get to take each year as a percentage of the total value of your rental property, and it reduces your taxable income as a result. For example, let’s say you bought a rental property for $200,000, and you plan to lease it out for an average of $2,000 per month. At the end of the year, your taxable income would be $230,000 based on a taxable income of $130,000. If you take the standard deduction of $12,000, you’ll end up with a taxable income of $105,000. So even if you don’t care about taxes as much as you care about protecting your investment, you should still take the standard deduction so you don’t lose any tax benefit by choosing the lower taxable income. Where you can find out what your depreciation rate is? You can get this information from Form 6206, a depreciation schedule you fill out yourself. This form is filled out for each property you own, and you can probably get away with not keeping track of each one for a while.
2. Real Estate Taxes
Another tax deduction you can take for your rental property is the deduction for real estate taxes. As with depreciation, this is a percentage of your total value that you can deduct from your income. The only difference is that you don’t have to attach a depreciation schedule to this deduction. Instead, you just have to fill out Form 1086 to prove how much tax you paid on your rental properties. And just like with depreciation, you can probably get away with not keeping track of all your real estate taxes for a while. In fact, it’s probably a good idea to keep track of your real estate taxes even if you aren’t planning on taking this deduction. The IRS will eventually audit rental property taxes and could ask to see proof that you paid what you owe.
3. Home Office Deduction
Most rental property owners will be able to take advantage of a home office deduction as well. This is a deduction you get to take if you use part of your home for business purposes. First, you have to meet the total space requirement of 500 square feet, which is probably doable for most homeowners. Next, you have to show that you used that space for business. As with the depreciation and real estate taxes deductions above, you have to keep track of each of your home office expenses yourself. You can’t just trust that you’re getting the right amount deducted. If you use a self-employed contractor to do repairs and renovations, they may be able to claim the cost as a business expense.
4. Investment Interest Deduction
Another tax deduction you can take for your rental property is the investment interest deduction. This is a deduction you get to take if you make any investment in your rental properties, including renovation costs, depreciation, and business expenses. If you don’t meet the total investment amount requirement of $10,000, it’s still possible to get the deduction for most investments you make. However, you have to be careful about how you choose investments for this to work for you. For example, if you own rental property, you can’t choose to put your money into your rental property instead. You have to choose an investment that will provide you with a profit at some point in the future.
5. Casualty and Theft Loss Deduction
The final tax deduction you can take for your rental property is the casualty and theft loss deduction. This is a tax deduction that you get to take if your rental property is damaged or stolen while you own it. First, you have to prove that the damage or loss occurred while you owned the rental property. This is done by filling out Form 4665 and attaching it to your tax return. Next, you have to show that the damage or loss was over $100 and you didn’t file a claim against it with your insurance company first. This is done by filling out Form 8919 and attaching it to your tax return.
6. Basis Adjustment
One last tax deduction you can take for your rental property is the basis adjustment. This is a tax adjustment that you get to make when you buy a rental property. As the name suggests, it lets you change the original purchase price you paid for your rental properties to the current value. This is a complicated process, and it’s probably not something you want to attempt on your own. You need to hire a tax professional to do this for you, as well as other real estate taxwork you need to get done. You can hire a real estate tax attorney to avoid any legal issues while they handle this work for you.
7. Other Deductions
Finally, we come to the other tax deductions that can help you save money on taxes while you own rental property. Some of these, like the depletion allowance and the qualified public charity deduction, aren’t really new this year. In other words, they’ve been around for a while and didn’t really change much this year. However, they’re still worth mentioning here because they’re still helpful. The qualified depreciation deduction helps you recover some of the cost of your rental property as it is used. For example, if you put in new dishwasher appliances this year, you’ll be able to deduct part of their cost from your taxes.
Owning rental property can be a lucrative investment, but it can also be extremely complicated. That’s why it’s important to be prepared for the tax deduction process.
Now that you know about the top tax deductions for rental property, you can begin protecting your investment. After all, you wouldn’t want to miss out on these important tax benefits. On a final note, be sure to keep track of these expenses using a fully operational accounting platform like Quickbooks.
My name is Nick Caucci and I help run the Rentroom blog. Over the years, I have seen and helped many different property managers and owner-operators streamline their daily, weekly, monthly, and yearly workflows.