Owning investment property puts you in position to make significant profit if you manage your investment well. Part of managing your investment involves filing taxes on each property that you own. You must report income from investment property, and you must pay tax on this income. You also can claim deductions for some costs related to your investment property. You must understand what you can deduct in order to manage your property with maximum efficiency and profit potential.
Rental Property Expenses
When you rent investment property, you benefit from many tax deductions. You can claim a deduction for expenses related to repairs. You must claim the deduction for the year that repair work was completed. Repairs are listed on Line 15 of IRS Form 1040, Schedule E. Repairs include only work that is ordinary and necessary to maintain the home. Examples include repairing or replacing a leaking roof, exterior and interior painting, installing a new water heater and replacing a broken sewer line. Upgrades do not qualify for a deduction unless the upgrade replaces something that is in need of repair. You also can claim insurance costs, the cost of hiring contractors to work on the property, mortgage interest, depreciation and costs for hiring an attorney or another professional.
If you drive a car or fly to conduct activity related to investment property, you can claim a tax deduction for these costs. You can claim either a deduction of actual expenses or a standard mileage deduction for miles driven. If you travel a significant distance requiring overnight stays, you can deduct the cost of a hotel, meals and some related expenses. You also should be aware of federal rules that allow you personal use of a rental property for only a maximum of 30 days. If you use the property for more than 30 days, you cannot claim rental expenses on the property.
To claim investment property expenses, you must elect to itemize tax deductions. You also must file IRS Form 1040, Schedule E to report expenses and depreciation for each property. Schedule E only provides enough room for three rental properties. Therefore, you must add additional Schedule E filings for additional properties.
To deduct investment property expenses, you need to keep receipts and records for these expenses. These provide proof of your right to claim the deductions. You will need this proof if the IRS chooses to audit your tax return. Canceled checks and receipts should be kept in a separate file for each investment property. If you do not have documentation to support your deductions, the IRS might disqualify you from claiming the deduction during an audit, and you can be subject to fines and, potentially, criminal charges if an investigation shows that you may be guilty of tax evasion.
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