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Owning rental property can be an excellent investment, but it comes with its fair share of tax implications. For business owners who are diving into the world of rental real estate, understanding the ins and outs of rental income and expenses is crucial to ensuring you’re maximizing your tax benefits while staying compliant. Here, we break down some key aspects of rental income, deductible expenses, and strategies to help you get the most out of your rental property in 2024.
What Counts as Rental Income?
Rental income is more than just the monthly rent payments you receive from your tenants. The IRS considers several other types of payments as rental income, including:
- Advance Rent: Any amount received before the period that it covers.
- Lease Cancellation Payments: If a tenant pays to cancel a lease, that amount is considered rental income.
- Tenant-Paid Expenses: Any expenses your tenant pays on your behalf, such as maintenance or improvements, must be reported as income.
- Property or Services Received: If your tenant provides property or services (e.g., painting your rental property) instead of paying rent, the fair market value (FMV) of these services is considered rental income.
For example, if your tenant covers the cost of repairing a furnace and deducts it from the rent, you must report the repair cost as rental income. Fortunately, you can also deduct this cost as a rental expense.
What Expenses Can You Deduct?
One of the biggest advantages of owning rental property is the ability to deduct various expenses. To be deductible, an expense must be both ordinary (common in the rental business) and necessary (helpful and appropriate for your property). Some key deductible expenses include:
Repairs: Deductible in the year incurred. This includes tasks like fixing leaks, repainting, and replacing broken windows.
Improvements: These must be capitalized and depreciated over time, such as installing a new roof, adding rooms, or significant landscaping.
Depreciation: Once your property is ready for rent, you can begin depreciating its value. This deduction allows you to spread the cost of the property and certain improvements over its useful life.
Travel Expenses: If you need to travel to manage, maintain, or collect income from your rental property, you can deduct transportation and lodging costs. For local travel, you can deduct the actual expenses or use the standard mileage rate, which is 67.0¢ per mile for 2024.
Insurance Premiums: Insurance premiums can be deducted, but if you pay more than 12 months in advance, you’ll need to allocate the deduction to the appropriate years.
Local Transportation: Costs incurred for managing and maintaining the property are deductible. This includes trips to the property for inspections, collecting rent, or handling tenant issues.
Handling Security Deposits
Security deposits are generally not included in your rental income if you plan to return them to the tenant. However, if you keep any part of the deposit because the tenant fails to meet the terms of the lease, that amount is considered rental income and should be reported in the year it is retained.
Managing Mixed-Use Properties
If you rent out part of your home (e.g., renting out a room or a basement), you can still deduct some expenses, but you’ll need to allocate costs between personal and rental use. For instance, if your tenant rents 10% of the total square footage of your home, you can deduct 10% of shared expenses like utilities and maintenance costs.
Personal Use of Rental Property
There’s a special rule if you rent out your property for 14 days or less during the year: you don’t have to report the rental income, and you can’t deduct expenses related to the rental use. This rule is a great way to generate tax-free income if you rent your home or vacation property for short periods.
Tax Strategy for Business Owners with Rental Property
For business owners who own rental properties, understanding the tax implications can be a game-changer. Here are a few strategies to ensure you’re optimizing your tax position:
- Keep Detailed Records: Whether it’s for repairs, maintenance, or travel, keeping accurate and detailed records is essential. This helps ensure that you can substantiate all your deductions in case of an audit.
- Use Depreciation Strategically: Depreciation can lower your taxable rental income significantly. Be sure to take full advantage of this deduction by understanding the depreciation rules for rental properties and improvements.
- Consider Professional Tax Help: Tax rules for rental properties can be complex, especially when it comes to allocating expenses between personal and rental use. Consulting with a tax professional ensures that you’re not leaving money on the table or making costly mistakes.
Final Thoughts
Understanding the tax rules for rental properties is key to making the most of your investment. From tracking rental income to deducting the right expenses, business owners can significantly reduce their tax burden with proper planning and attention to detail.
If you have questions about how to maximize your rental property deductions or if you need help with your tax strategy, contact us at IRSProb.com for expert advice tailored to your situation.
