Does Owning Rental Property Help You on Your Taxes?

Tamsen Butler
Tax considerations for owning rental property

Does owning rental property help you on your taxes? The answer depends on several factors, including whether you have mortgages on the rental properties or if you own them outright.

What the IRS Says

You will have to itemize your taxes in order to derive any benefits from owning a home, whether you rent the house out to tenants or live in it yourself. The best source for information regarding itemized tax returns and other tax related issues specific to your individual situation should be directed to a competent tax professional.

The Internal Revenue Service explains how rental income should be reported with regards to your taxes on its informative website. Important things to take into consideration with regards to rental income and taxes include:

  • The rent you receive from tenants is considered income.
  • If a tenant makes improvements on the property, and does not charge you for these improvements, the value of these improvements is considered income.
  • Security deposits that will not eventually be returned to the tenants is considered income.

Obviously landlords must take care to keep accurate records of all transactions associated with rental payments and other transactions. Regardless of if the income helps or hurts your taxes, the IRS demands accuracy in reporting any rental income from property.

Deductions

The positive side of this all is that rental properties are considered business ventures and therefore any money you pay in order to run your rental business is potentially tax deductible. In other words, expenses associated with keeping your rental properties suitable for tenants can be deducted from your taxes as long as you have documentation to support your expense claims. You cannot simply report to the IRS that you spent a certain amount of money to keep up your rental properties but not support your claim with proof. That isn't how tax deductions work.

Does owning rental property help you on your taxes? The expenses related to owning rental properties are necessary expenses that can give you potential tax deductions as long as you itemize your taxes. What types of expenses are eligible for deduction on your taxes? As long as the expense is related to the upkeep of your rental home or the administrative tasks associated with being a landlord, you can submit them with your annual income taxes and claim them as deductions. Examples include:

  • The cost of repairs to the home
  • The amount of interest you pay for mortgage and equity loan interest payments
  • The costs of advertising for new tenants and other administrative tasks

Deduction Exception

Just because expenses related to renting property are potentially tax deductible it does not automatically mean that every single expense will be deducted from your taxes. For example, if the amount of money you spend maintaining the home exceeds the amount of income you receive from rent then you may find that all your expenses are not deductible.

Questions regarding the status of rental income as it pertains to tax deductibility should be addressed to a tax professional or to the IRS. Since every landlord has different situations with regards to tenants and expenses, there is not one single rule that governs all rental properties in one fell swoop.

Does Owning Rental Property Help You on Your Taxes in Other Ways

Beyond standard income deductions, some financial experts suggest other ways that owning rental properties can help with taxes. Some of the methods these experts use might be considered a little tricky or maybe even unscrupulous by some, but if the transactions are legal the IRS will not penalize the transactions.

For example, some landlords obtain home equity loans on their rental properties for the maximum amount and then use the proceeds from the loans in order to invest in insurance products that are not taxed. Investors must always keep in mind, however, that any time equity is used as collateral for financing, there is the potential for losing the home if payments are not met.

Does Owning Rental Property Help You on Your Taxes?