Which Expenses are fully deductible on a rental property?

10 Replies

I read many articles saying that you can deduct your property management fee or your repair costs or your insurance cost from your tax on your rental property, are those fully deductible??? Like if the property management fee is 50 x 12 = 600$ , they  take off 600$ from my taxes??? Please someone make it clear 

Just an amateur here, ask your CPA for a better answer. Not giving tax advice.

Sort of. They are deductible from your rental income. If your rents collected are $1200 and your expenses are $600 for a month, you’d only pay tax on the $600 profit. So the expenses reduce your income, not your tax burden. “Above the line”. Tax credits come straight off your amount due.

Meals and entertainment are 50% deductible, I believe.

Also not a tax professional.

An important part of this is having a real estate business, or LLC and getting educated in that area. too much to explain here, but a deduction doesn't decrease your tax directly. A deduction counts against your income. So if you make 60k that you would normally be taxed on, and you have a 600 expense, your new taxable income is 59,400.

If you have a bunch of deductions, it reduces the taxable income, AND can put you in a lower tax bracket.

ALSO, don't forget depreciation.  If that's a new term for you, research it.  Its an often overlooked source of income from a property if you are holding it for a while.  Property and Chattel depreciation can reduce taxes significantly, and for a lot of years. 

Depreciation reduces taxes but it also reduces the value of the property because you are depreciating it right? So when i want to sell it it sells for less than what i paid for ? I can t really understand depreciation 

@Eli Kfouri Hi Eli. 

In a nutshell:

Any rental income (rent received) from your rental property is reduced by cash and non-cash deductions (expenses).

Cash deductions: pretty much any out-of-pocket expense related to the rental property like management fees, RE taxes paid, mortgage interest (i repeat, INTEREST PORTION ONLY), utilities, repairs, insurance, and so on. So, if you spend money on your rental property, it should be deductible, but with some caveats. Some expenditures have to be capitalized, like major improvements. 

Non-cash deductions: depreciation on your property, improvements, equipment. You take a portion of the value each year (usually over 27.5, 15, 7, 5 years) as a deduction. Depreciation does not reduce the value of your property, it only reduces your basis in the property. So, when you sell the property your gain on sale will be calculated based on adjusted basis in the property (original cost + capitalized improvements & purchases - depreciation). 

SO (in a nutshell): 

Rent received + any non-refundable deposits = Rental Income

Expenses (non-capitalized) related to the rental property + depreciation + your travel = Rental Expenses

Rental Income - Rental Expenses = Taxable Rental Income or Loss 

Depending on your situation and income level, the rental loss might or might not be deductible. If not deductible in current year, it will be carried over to future years. If when you sell the property you still have unused loss carryover, you can apply it to reduce capital gain on sale. 

Feel free to reach out with questions. I have clients who invest in rental properties in different states. 

@Vlad K. I own a house in upstate NewYork I am planning on selling it in summer, it could sell for 140k , I found a turnkey real estate investing called MORRIS INVEST , I talked to the president of the company he told me he could get me a duplex in Jacksonville fl anywhere from 60k to 70k , and he told me it could produce  a 650$ of cash flow per side, which I believe its true because rents there are about 850$ a month and the taxes are cheap there , I am planning on buying one from him, rent one side and live in the other one , then later on if I see great cash flow coming in ,  i will buy another one from him . We still discussing everything now. Got any advice for me? but in Jacksonville, there is some pretty high crime rate but its the same rate in where I live, I know I gotta make some research on the area where the property is located before I buy it.

Originally posted by @Eli Kfouri :

Depreciation reduces taxes but it also reduces the value of the property because you are depreciating it right? So when i want to sell it it sells for less than what i paid for ? I can t really understand depreciation 

Dude... You need to learn basic accounting.  Depreciation is on purchase value of the asset. When you are selling it, you are doing  it at market price.  It doesn't matter at that point, if the asset has depreciated to $0.00 for tax purposes. 

@Eli Kfouri make sure you research Morris Invest prior to purchasing from them. Feel free to message me for more info but as someone who lives in Jacksonville, they sell properties in areas that are very difficult for out of state investors.

There are a couple of running threads here on BP about Morris Invest.  In reading them you will find ample reason to be extremely cautious.  Further, they are just a marketing company.  Be sure you learn about who the underlying seller really is.

Hey @Eli Kfouri look into de minimis safe harbor. A new ruling in 2016 allows you to write off a lot of items for big boosts in tax savings.

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