Tax Implications of Owning a Residential Rental Property

by Emma Watkins

    The rent you collect is subject to income taxes. As a landlord, you have to declare it to the IRS as part of your gross earnings. But you can also reduce your rental income -- and thus lower your tax liability -- if you incur certain rental expenses during the fiscal year. Before you file your tax return, understand what the IRS considers rental income and what write-offs the U.S. tax code grants landlords.

    Rental Income

    The IRS charges you income tax on your rental income. The agency also specifies that rent is more than just what the tenant pays you on a schedule for occupying your property. It includes advance payments you receive, fees the tenant has to pay you to break the lease, any part of the security deposit that you withhold at the end of the tenancy, and any payments the tenant makes that a landlord would normally be responsible for, such as for appliance repairs. Although the rent you collect increases your taxable income, certain expenses associated with your rental property reduce it.

    Interest

    As a landlord, you get to deduct from your rental income the mortgage interest you pay on the property. In addition, if you use a credit card to pay for repairs, appliances or other required expenses, any interest you pay on those charges is also deductible.

    Repairs

    The cost of repairs is deductible from your rental income; however, if you provide the labor, you may not deduct its value from the rent you collect. If you pay someone else for his labor, you can deduct those charges.

    Travel

    If you use your car to conduct business related to your rental unit, you can deduct the standard business mileage rate for the miles you drive from your rental income. You can also deduct 50 percent of the cost of meals while traveling as a landlord, and toll and parking fees. If you have a large rental-property operation that requires more than four cars to maintain it, or if you use leased cars, you cannot use the standard mileage rate. You have to deduct from your rental income the actual expenses for fuel, oil, insurance, new tires, renewing license plates and any other costs you incur to keep the vehicles running.

    Depreciation

    Depreciation is the expected wear and tear your rental property undergoes over the years. The U.S. tax code allows you to reduce your rental income by the unit's depreciation value. A tax accountant can help you calculate the depreciation of your property. You may first claim depreciation in the first year you rent the property to someone. You can then continue to take the deduction every year until the total deductions equal the amount you paid for the rental.

    Other Tax Write-offs

    If you use a property manager to oversee your rental property, you may deduct from your rental income all fees you pay for the service. The cost of consulting with a tax accountant and getting the tax forms related to your rental prepared and filed also reduce your income, as can your costs for telephone calls and advertising. In case of an audit, keep records, such as receipts and bank statements, to prove your expenses.

    Photo Credits

    • apartment for rent image by dead_account from Fotolia.com

    About the Author

    Emma Watkins writes on finance, fitness and gardening. Her articles and essays have appeared in "Writer's Digest," "The Writer," "From House to Home," "Big Apple Parent" and other online and print venues. Watkins holds a Master of Arts in psychology.

    Zacks Investment Research

    is an A+ Rated BBB

    Accredited Business.