As you probably know, passive income property can be very profitable under the right conditions. But did you know that your rental properties provide you with lucrative tax breaks and deductions?
If you are unaware of rental property deductions at tax time, you could be forking over more money than you should. The IRS provides opportunities for passive income investors to keep more of their profits. All it takes is a little more attention to detail.
However, the IRS is not in the business of saving you money. As a result, you are responsible for discovering these benefits, and this article will make you aware of most of them. Here are more details about these real estate passive income tax benefits.
Interest
Current interest rates are relatively low. But they still rank among the highest expenses in owning rental property. Plus, with the Federal Reserve chairman’s indication of pending interest rate hikes, this deduction can be a significant money saver for you. So, mortgage interest is one of the beneficial deductions available to landlords.
Along with mortgage interests, you can deduct interest on loans used to purchase, expand, or enhance rental property. The interest must belong to debt affiliated with a primary or secondary home from $750,000 to $1 million, depending on the year you bought the residence.
For example, if you purchased a $600,000 rental property with a $450,000 mortgage loan, your first-year interest payment would total $18,000 at 4 percent interest. Suppose you make $60,000 in rental income. In that case, you can take an $18,000 deduction to lower your taxable rental revenue to $42,000.
In addition, if you deduct any other interest related to your rental property, your taxable rental income would be even lower.
Depreciation
Since depreciation losses allow you to deduct the cost of your rental property over a predetermined period, depreciation tax write-offs are an extremely valuable tax deduction. You can benefit from depreciation losses because the IRS considers your rental property a business expense like a delivery truck or crane.
The basic premise of rental property depreciation is that your property has a definable useful life subject to devaluing factors such as decay, wear and tear, obsolescence, and natural degeneration. Therefore, if your passive income-producing property has a life expectancy of more than one year, your earnings on your property qualify for depreciation write-offs.
The IRS uses the Modified Accelerated Cost Recovery System (MACRS) to calculate the loss of value of your rental property by spreading the cost over its estimated useful life of 27.5 years for residential property and 39 years for commercial property. As a result, you can offset the annual cost of maintaining your rental property despite double-digit increases in the home’s actual value.
Repairs
You can deduct repairs to the rental property provided they are ordinary, essential, and within a reasonable price. Also, you can only deduct cost expenses in the year you completed them. Common deductible repairs include repainting, plastering, broken window replacement, and floor patching.
Before making a laundry list of repairs, you should know that common repairs and improvement repairs are very different. The IRS classifies improvement repairs as work that makes your passive income property better than its initial state, restores it to operating condition, or modifies it for a new use. Therefore, if any of your repair expenses fit any of these descriptions, the IRS will not honor them as deductions.
Travel Due to Rental Activity
Except for maintenance costs, many passive income investors are oblivious of net profit increasing tax deductions like traveling expenses relating to managing their rental property. You can deduct travel to any place for the benefit of your rental. This allotment includes gas, repairs, and other forms of vehicle upkeep. However, you must take the deductions in the year you incurred the travel expenses.
Home and Office Expenses
As a passive income investor, you share the same work-at-home tax status as most remote professionals. Therefore, you can deduct your home office by meeting the minimum requirements, regardless of whether you are a homeowner or renter. Note that the American Tax Cuts and Jobs Act of 2018 changed these requirements for employees, but not for self-employed people until the year 2025.
First, however, you must verify that the effort you put into your passive income property is a profit-making venture and not a hobby. Then, it is up to the IRS to determine whether your activities are profit-making. So, meeting the IRS requirement for at-home work is essential to get these deductions.
You can meet IRS home office requirements by taking these measures: (1) Route all business mail to your home office address. (2) Print your home address on business cards and stationery. (3) Install a separate business phone line. (4) Maintain a record of renter visits. (5) Keep office hours. Visit the IRS website for more information.
Making the Most of Your Passive Income from Real Estate
With inflation rates rising, tax benefits from your rental property provide a way for you to maximize your net passive income. It may take a little more effort or a visit to a tax professional, but the financial benefit can be substantial.