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      Tax Deductions on Rental Property- File Your Tax-Returns Smartly

      • 5 min read
      • Last Modified Date: February 8, 2023
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      Every year, you will come across that millions of landlords pay more tax on their rental income than they are required to pay. Have you ever thought about why this happens?

      Most probably, this is so because the landlords fail to understand and take advantage of the tax benefits available for the rental property owners. However, you need to know that besides the potential for regular income and capital growth, real estate investments offer multiple tax deductions that can reduce the payment on your rental profits.

      Thus, why not, you know?? The landlords’ top expenses are eligible for claiming tax deductions on the rental property.

      The Top Ways for Claiming Tax Deductions from Rental Property

      Property Tax

      Almost every state and local government duly collects property taxes. Further, depending on your rental property’s location, the property tax rate can range anywhere between a hundred to thousand rupees. So, it would help if you found your exact tax rate prevailing in the area by inquiring with your municipal bodies or checking out with your tax professional.

      However, if your state has a rental licensing requirement, you can deduct any rental license fees with it in addition to the property tax.

      Moreover, if you are paying sales tax on your business or wage and social security taxes for the employees, you can easily deduct those expenses.

      Repairs and Maintenance

      Speaking of the cost of things such as fixing the garbage disposals, swapping out the light bulbs, or the patchy holes in the walls are all tax-deductible in the year you have incurred the expenses.

      But, sometimes, the cost isn’t deductible. And instead, it gets capitalized to the particular asset and becomes part of your basics. For example, if you buy a rental property at  Rs 2,00,000 and spend Rs 25,000 to add a bedroom to it, you might not always get to deduct Rs 25,000 on that particular year.  This is so because in the eyes of the Internal Revenue Service or IRS, as you have now paid Rs 25,000 for the house, it should be capitalized with the asset’s cost. And instead of taking Rs 2,00,000, now it should be considered Rs 2,25,000 as the asset’s cost.

      Indirectly, it means you can claim off a more considerable amount as a depreciation yearly. But, often people misclassify, the cost of repairs and maintenance as a separate expense while filing tax returns every year. However, in the IRS’s eyes, if the property’s cost is less compared to the fees on improvements, some of these should be capitalized instead.

      The few significant examples of the expenses on repairs that IRS considered capitalized include landscaping and sprinkler system, storm windows, new rooks, security systems, and flooring.

      Utilities

      Mostly every landlord handles different utilities or facilities so provided to the tenants. And if you chose to cover the utilities like gas, electricity, water, heating, and AC for your tenants, they are fully tax-deductible.

      Further, if you are paying for internet, cable, or satellite, you can deduct those as a utility expense as well. Even if your tenant agrees to reimburse the utilities described above amount, you can continue to file a return and claim the deductions on the rental property that are repaid as income.

      Insurance Premiums

      You are also eligible to claim tax deductions on the premiums you pay for almost every insurance you do for your rental property. This includes fire, theft, and flood insurance for the rental property and any landlord liability insurance.

      Further, if you have employees, you are allowed to claim deductions on the insurance premium relating to the workers’ health and safety.

      As a landlord, you can also claim tax deductions for the fees you have paid to the attorneys, accountants, property managers, real estate advisors, and other professionals as operating expenses, as long as these fees are related to your rental activities.

      Further, you can also claim deductions as a lost income and show while filing a return if your rental property remains vacant for some of the time.

      Travel Expenses

      The money you spend on travel for the collection of rent, its management, or advertisement associated with the rental property are tax-deductible.

      However, if the trip’s purpose was for the improvements, you need to recover and include such expenses under the depreciation.

      But, in general, under the IRS, you can’t deduct the expenses like travel between your home and rental property unless your home is the principal place of business.

      The uncollected rent is not allowed for tax deductions and depends mostly on the method you’re using for your rental income.

      Security Deposits

      Security deposits are not taxable in the year when you receive them if the intent is to return the said amount to the tenants at the end of the lease term.

      But, if the tenant lives up to the lease term, and moves out to a new place, then the amount on the security deposit is an income. You are yet eligible to deduct such said amount on filing the tax return, as you have incurred a loss of a certain amount on the rental vacancies, which is due to unforeseen circumstances.

      Further, if the tenant deposits Rs 500 as security and moves to a new place, leaving holes in the wall that cost around Rs 400 for repair, you can deduct that amount from the said year’s security deposit. Though you must include Rs 400 that you used in repair as income, you can still remove and show Rs 400 as rental expenses.

      Tenant-paid Expenses

      Sometimes, it happens that some of the expenses, for instance, the cost of repair of a refrigerator in an emergency, is paid by the tenant while you are out of town.

      In such a case, you are eligible to deduct the repair payment as a rental expense, as long as the fee is related to your rental property.

      Trade for Services

      Often you find that your tenant offers to trade in services in exchange for the rent. In such a situation, you need to include the services’ fair market value, thus provided as your income.

      For example, if your tenant offers to paint the rental house in exchange for one month’s rent, which is valued at Rs 1,000. At that time, you need to include Rs 1,000 as your rental income, even though you didn’t receive it in cash.

      However, afterward, you are eligible to include such expenses as your rental expense and further claim tax deductions on rental property.

      Depreciation

      In general, over time, the rental property’s value gets lowered and becomes obsolete due to normal wear and tear. This process is known as depreciation and is tax-deductible. Further, you are allowed to claim depreciation as soon as your apartment is available for rent, even if you don’tdon’t have any tenants yet.

      This deduction can be taken during the property’s expected life but needs to be spread out over subsequent years, respectively. You can also claim depreciation for the value of the equipment that helps you in running your rental business, like a computer or automobile, and any other improvement made to extend the life of the property.

      Tips For Claiming Tax Deductions on Rental Property

      Take Property in Joint Name

      It is advisable to take the rental property in joint name if your spouse is an earning member, and your annual interest on home loans is more than Rs 2,00,000.

      This is so because taking the property as a joint owner will give you the advantage of claiming a standard deduction of upto Rs 2,00,000 individually.

      Claim Interest paid during Construction

      You need to remember, for claiming the interest you’ve paid during the construction period after the completion of the property construction. This interest that you’ve paid under-construction can be claimed in five equal installments in the five subsequent financial years, post to the complete integrity construction.

      Claiming deductions on Owning of two Houses

      For instance, if you own two houses, a self-occupied one and the other one, a vacant house, in such a case, you will be required to pay a property tax based on the fair rental value of your new home.

      So, it’s better to rent out your second house, i.e., the vacant house, to keep up with the regular income flow and reduce taxes burden.

      How Can You Claim Tax Deductions on Rental Property?

      In general, you are required to file a return on the rental property for claiming tax deductions the same year in which you have paid the expenses, using the ”Schedule E Form”.

      Often viewing the several rental deductions, the taxpayer adopts the critical process to evaluate the tax on rental property. Moreover, if you used the property for personal use at any point in time, you can’t file Form E for that much of time, and instead will need to file ”Schedule Form A”. The Schedule E denotes the number of days you used your home for personal use, and the other, the percentage of days your property was rented out at fair market value.

      Thus, it is advisable for making the process more manageable; you need to keep detailed records of all your income, the number of days the property was used for rent, and your costs related to the property. Further, if you’ve consulted any tax expert and claimed deductions described above, you will be required to provide proof on the same.

      Hence, be cautious and consult your professional experts before making any new decision on the same.

      Tax Deductions on Rental Property FAQs:

      Sometimes, some of the expenses, for instance, the fee on the repair of a refrigerator in an emergency, are paid by the tenant while you are out of town.

      In such a case, you are eligible to deduct the repair payment as a rental expense, as long as the cost is related to your rental property.

      It is advisable to take the rental property in a joint name if your spouse is an earning member, and your annual interest on home loans is more than Rs 2,00,000.

      This is so because taking the property as a joint owner will give you the advantage of claiming a standard deduction of upto Rs 2,00,000 individually.

      Schedule Form E is required for claiming tax deductions on rental property.

      Schedule Form A is required if the rental property is used for the taxpayer’s personal use for a part of the year.

      Assetmonk Investment

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