Jake Miller
There are several expenses that are deductible for rental property owners, including mortgage interest, property tax, operating expenses, depreciation, repairs, and maintenance. However, it is important to note that there are also certain expenses that cannot be deducted, such as improvements, personal expenses, fines, and fees. In addition, rental income must be reported on your tax return, and it includes more than just the monthly rent payments. As a rental property owner, it is essential to understand which expenses are deductible to maximize tax benefits and ensure compliance with tax regulations.
| Characteristics | Values |
|---|---|
| Bank fees | Monthly service charges, transaction fees, ATM fees |
| Bank fees write-off | Schedule C, Box 10 |
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What You'll Learn
Mortgage interest
If you own a rental property, you can deduct mortgage interest on that property. This includes interest on the loan used to purchase the property. However, the deductibility of mortgage interest can be subject to limitations, such as the passive activity loss rules.
For example, if you use the property for personal use part of the time and rent it out for the rest of the time, you may need to allocate expenses between personal and rental use. The portion of the mortgage interest that relates to your personal use may not be deductible.
In the United States, the Home Mortgage Interest Deduction (HMID) is a tax benefit primarily for homeowners. As a homeowner, you can elect to itemize rather than take the standard rental property tax deductions on your property taxes and claim the interest on the first $750,000 of mortgage principal borrowed on your Schedule A. However, you cannot take the HMID on your rental properties as a landlord or rental property owner. Instead, you can deduct the mortgage interest on your rental property as a business interest expense on your Schedule E. This offers much more flexibility and doesn't require itemization on Schedule A.
In Canada, you can also claim mortgage interest or interest on money borrowed to finance the purchase of your rental property or to improve it.
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Property tax
If you own a rental property, you must report your rental income and pay taxes on the taxable portion of that income. The good news is that there are tax deductions you can claim to reduce the amount you owe in rental income tax.
Rental income is any payment received for the use or occupation of property. This includes advance rent, which is any amount received before the period that it covers. Security deposits are not taxable when you receive them if the intent is to return the money to the tenant at the end of the lease. However, if the tenant does not live up to the lease terms, you must include the deposit as income for that year. If a security deposit is used as a final rent payment, it is considered advance rent and must be included as income in the year it is received.
If you own a part interest in a rental property, you must report your part of the rental income from the property. If you receive rental income from the rental of a dwelling unit, there are certain rental expenses you may deduct on your tax return. These expenses may include mortgage interest, property tax, operating expenses, depreciation, and repairs.
Ordinary and necessary expenses for managing, conserving, and maintaining your rental property can be deducted. Ordinary expenses are those that are common and generally accepted in the business, while necessary expenses are those deemed appropriate, such as interest, taxes, advertising, maintenance, utilities, and insurance. You can also deduct the costs of certain materials, supplies, repairs, and maintenance that you make to keep your property in good operating condition.
In Canada, the rent you collect from tenants is considered income and must be reported on your tax return. However, you can deduct eligible expenses first and then calculate the tax payable on the remaining amount. There are two types of expenses: current and capital. Current expenses are those incurred to maintain the rental property, such as repairs, and can be deducted in full in the relevant tax year. Capital expenses are expenses that enhance the value of the property and have a long-lasting life, such as upgrading flooring, and are treated differently.
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Operating expenses
As a rental property owner, you can deduct various expenses related to buying, operating, and maintaining the property. These expenses are deductible from your total rental income.
Other deductible expenses include:
- Mortgage interest
- Property tax
- Depreciation
- Repairs
- Utilities
- Maintenance fees
- Local benefit taxes
- Local transportation expenses
- Pre-rental expenses
- Rental of equipment
- Travel expenses
- Commissions paid to a real estate agent or property management company
It is important to note that personal expenses, fines, fees, or uncollected rent are generally not deductible. Additionally, obtaining mortgage expenses such as commissions and appraisal fees are not deductible when you pay them, but these costs are added to your basis in the property.
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Repairs
Ordinary expenses are those that are common and generally accepted in the business of renting property. Necessary expenses are those that are deemed helpful and appropriate for your rental business. These expenses are for the upkeep of your property and do not add significant value or extend its life.
It is important to note that upgrades or improvements to a rental property are generally not deductible as repairs. An improvement adds value to the property, and the cost of an improvement may have to be depreciated over several years. For residential rental property, the standard depreciation period is 27.5 years. An example of an improvement is adding a new shed or remodelling a bathroom.
To ensure that an expense is considered a repair and not an improvement, it is best to patch, mend, or fix things that are broken, instead of replacing them. For example, if the roof is leaking or damaged, repair or replace only the damaged shingles; don't replace the whole roof. If a tenant damages a portion of a carpet, have that part mended or cleaned instead of replacing the entire carpet.
Preventive maintenance costs are also deductible. This includes periodically changing the filters on your heating and air conditioning system, and installing zinc control strips on a roof to keep fungus and algae away.
To claim deductions for repairs, you must have records to support your claims. Documentary evidence, such as receipts, cancelled checks, or bills, is generally required.
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Bank fees
If you have taken out a loan for your rental property, you can deduct the associated fees, such as origination fees, credit report fees, and appraisal fees. These expenses can be reported on Schedule C, Box 10 as well.
Additionally, if you have a mortgage on your rental property, you can deduct the interest paid. This deduction can be significant, especially during the early years of a mortgage when the interest portion of the payment is typically at its highest. To write off this expense, report it on Schedule C, Box 16a.
Other deductible expenses related to your rental property include repairs, maintenance, utilities, property taxes, and insurance. It is important to note that expenses must be current expenses, such as those related to restoring the property to its original condition, rather than improving the property's value.
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Frequently asked questions
Bank fees that can be deducted from rental income include mortgage interest paid to banks and other financial institutions, as well as interest on credit cards used for goods or services for the rental property.
Other deductible expenses include property tax, operating expenses, depreciation, repairs, advertising, maintenance, utilities, insurance, and travel expenses.
Yes, certain expenses are not deductible, such as capital improvements, personal expenses, fines, fees, uncollected rent, and loan interest for personal purposes.
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