Tax Deductions on Rental Property

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Tax Deductions on Rental Property

Post by jamesdz » Fri Mar 29, 2013 9:55 am

Dear Bogleheads,
Hope that this question is allowed on the forum......will give it a try;

Considering purchasing a home in FL that we will rent for a few years before moving & occupying as our full time residence.
While renting the home, my internet research indicates that the following costs can be deducted from the annual rental income;
a) Property Tax
b) Home owners insurance
c) Rental management fee
d) HOA fee
e) Depreciation - based on property value (i.e subtract ~ land value) divided by 27.4

Major Repairs to home can also be depreciated - new roof, etc;
not sure about carpet replacement or painting walls - guessing that these items could be considered "expenses" & deducted in the year that the cost is incurred.

Since this will be a new experience for me, would like to get a confirmation from Bogleheads that have been down this route before.

Probably other costs that I can deduct, however the above items seem to be the major items to consider.

Thank you.

Jim Druz

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Re: Tax Deductions on Rental Property

Post by sscritic » Fri Mar 29, 2013 10:20 am

Take a gander at Schedule E. What expenses can you see? If you aren't sure of the meanings, read the instructions.

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Re: Tax Deductions on Rental Property

Post by gkaplan » Fri Mar 29, 2013 12:11 pm

Also read the following publications:

(There will be a open-book test later on.)

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Re: Tax Deductions on Rental Property

Post by Ace1 » Fri Mar 29, 2013 12:28 pm

Regarding depreciation, you are correct in that only the building should be depreciated ( land does not usually wear out), however the first year the asset is placed in service, it is a different percentage based on month placed in service.
All years thereafter it is 27 1/2 years life calculation.
The publications noted by others contain most all the answers to rental property questions.

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Re: Tax Deductions on Rental Property

Post by Calm Man » Fri Mar 29, 2013 1:13 pm

Why bother?

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Re: Tax Deductions on Rental Property

Post by rogermexico » Fri Mar 29, 2013 2:58 pm

There are also some special expense rules for your first year in business. I'd recommend buying "every landlord's deduction guide"/ NOLO press or check it out at local library. Pretty thorough.

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Re: Tax Deductions on Rental Property

Post by johnubc » Fri Mar 29, 2013 4:07 pm

and do not forget about the interest expense....

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Re: Tax Deductions on Rental Property

Post by Twins Fan » Fri Mar 29, 2013 5:01 pm

Jim, yes to all. You seem to have a pretty good handle on it. And, as johnubc said, you get to deduct the mortgage interest also.
Calm Man wrote:Why bother?
I would guess he wants to get into a low interest rate mortage, and now is a good time for that. And, maybe there's a home available now that they really like. He did say they plan to move into it in a few years, so not just trying to pick up a hobby here.

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Re: Tax Deductions on Rental Property

Post by patriciamgr2 » Fri Mar 29, 2013 5:57 pm

You correctly noted that the expenses can be deducted "from the rental income". If your place won't cash flow positive (ie rent not greater than expenses including non-cash charges like depreciation), be sure to identify which losses can be deducted from other income. In general, IMO if you have only 1 property and have another job, it's almost impossible for you to meet IRS guidelines on this being an active business. So passive loss rules apply; and, of course, your depreciation reduces your basis for calculating gains if you sell the home in the future. i second the suggestion on the NOLO book or consulting websites designed for landlords.

one general caveat: if you buy an upgraded home, please be sure you can find renters in that area who will maintain it so that it remains your dream home. what you gain by buying it now you might lose by having to rehab it when you're ready to move in. Don't take the word of the realtor trying to sell the place to you; talk to some property management companies in the area.

good luck & best wishes

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Re: Tax Deductions on Rental Property

Post by travellight » Fri Mar 29, 2013 6:54 pm

I would think all business expenses related to managing the property would be tax deductible.... advertising costs, cleaning costs, all repairs including minor ones. These costs/expenses would offfset the rental income so that there may not be much if any taxes to be paid. It is my understanding that if your costs exceed your rental income, the losses carry forward so that they may offset any capital gains when you sell it in the future.

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Re: Tax Deductions on Rental Property

Post by john94549 » Fri Mar 29, 2013 7:08 pm

Since the issue of capital gains is now on the table, I'll add one more item to the OP's book-bag for the homework assignment, IRS Pub 523. Shifting from Nonqualified to Qualified (i.e., rental to owner-occupied) can impact the capital gains exclusion on sale, should one occur.

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Re: Tax Deductions on Rental Property

Post by jamesdz » Fri Mar 29, 2013 8:03 pm

Thanks to all for your comments & guidance; confirms much of my own research & adds a few points that I may not have considered.
Happy Easter !!!

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