Do you think you have made it as a landlord? Wait until you find out what tax cuts you are entitled to. There is certainly a lot of frustration with owning a rental property. However, when you think about what homeowners can save on income tax, you might want to think twice. Let's take a look at some ways homeowners save during tax season.
Mortgage Interest Deduction
Homeowners can deduct mortgage interest on home loans of up to $1 million. Property owners can also deduct a portion of the borrowed money that is part of their home equity loan. But you don't have to be a homeowner to get a deduction.
Landlords can also benefit from a tax exemption by deducting mortgage interest paid on the purchase or repair of the property. This is usually the most important deduction they can claim. When refinancing a property for an amount greater than the original amount, landlords may deduct additional interest and charges if the funds are used to improve or maintain the property.
Property Owners Qualify for Deductions Homeowners Don't
While there are many deductible expenses, specific deductions for homeowners are limited. This is not the case with landlords. In addition to interest and mortgage points paid over the life of the loan, landlords can get deductions for several types of insurance premiums, including home insurance and health insurance for their workers.
If you rent an apartment and accidentally break something, you won't be able to get a tax deduction to cover the damage from your own pocket. But if you are a property owner, you can deduct the cost of repairs you made for your tenants. Utilities such as gas and electricity and property taxes that tenants do not pay are also deductible.
Depreciation Deduction
Another benefit for property owners is the tax benefit they receive for the breakdown of their properties over time. However, they cannot deduct the full amount of depreciation at one time. Instead, they have to deduct these costs over a period of time: 27.5 years for residential properties and 39 years for commercial properties.
When it comes to depreciation deduction, there are other guidelines from the IRS. Only the value of the structure of the property and the items that are depreciated in the property (such as appliances and windows that need to be replaced) are considered deductible costs. Depreciation begins as soon as the asset is ready to be rented and ends when you stop renting it or recover the full cost of the investment, whichever comes first.
There is a problem, of course. The value of the land on which the property is located cannot be deducted. Thus, for a house of $250,000, the owner can only deduct the value of the building and not the $70,000 of the land. If they rented the house for 27.5 years, their annual deduction would be about $6,545.
Travel expenses are deductible.
Landlords who make routine trips to check their tenants' condition can deduct their travel expenses. This includes the cost of taxis, parking, and gasoline if you are using your car for the trip. Instead of deducting individual car travel expenses, owners can choose to use the standard rate per mile, which is 58.5 cents per mile for fiscal 2021.
If you are a property owner living in a different state other than your rented property, you can deduct the cost of a rented car, plane ticket, and hotel room. Meals consumed during the trip are also deductible. However, it is a good idea to be careful when deducting overnight travel costs. The IRS can audit you to deduct additional costs that you use for fun while on the trip.
Legal fees also count as deductible expenses.
Unfortunately, some issues can only be resolved in a courtroom. Property owners who are forced to evict tenants or take legal action for any other reason have the upper hand, at least financially. Unlike the tenants, they can deduct court costs and legal fees.
Conclusion
Homeowners benefit from various tax advantages. Provided that they are up to date with their supporting documents and that they have supporting documents for their deductions, they can considerably reduce their tax. If you are considering becoming a property owner, the deductions mentioned above may be good for you.
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