Maximizing Deductions on Your Real Estate Rental Property

Maximizing Deductions on Your Real Estate Rental PropertyDo you own rental property that’s been producing a marginal profit or a loss the past few years? Short of raising the rent again, you’re fighting an uphill battle as your expenses continue to grow. But one way you can maximize your rental dollars is to squeeze every last tax deduction from your activities. A little extra diligence can boost your profits or turn red ink into black. Surprisingly, many landlords don’t grab all the deductions they’re entitled to. Following is a list of 10 key landlord deductions that you should be taking advantage of.

Top 10 deductions for landlords

1. Interest. It’s usually the biggest deduction on the list, so don’t forget it. You can deduct mortgage interest on loans to acquire or improve your rental property, plus other interest incurred for assets or services used in the rental activity.

2. Depreciation. Most likely, this is the second-biggest deduction. You must depreciate residential rental property over 27.5 years.

3. Local travel. Track your auto expenses related to the rental activity. This isn’t limited to travel to and from the rental property. For instance, you can deduct trips to the hardware store or office-supply store. Use the standard mileage rate to figure your deduction. For 2007 the standard mileage allowance is 48.5 cents per mile.

4. Long-distance travel: If you’re required to travel overnight for your rental activity, you can deduct your airfare, lodging and other related expenses (including 50 percent of the cost of meals). Also, you can mix in a little pleasure, as long as the primary purpose of the trip is related to rental activity.

5. Repairs. Write off the cost of “ordinary and necessary” repair costs in the year in which they’re incurred. These include expenses for repainting, fixing gutters and leaks, plastering and replacing broken windows. Note: The cost of improvements, as opposed to repairs, must be capitalized and added to your basis.

6. Insurance. You can deduct insurance premiums for your rental property, including fire, theft and flood insurance and landlord liability insurance. If you have regular employees, you can also write off the cost of health insurance and workers’ comp insurance costs.

7. Salaries and contractor fees. When you hire someone to work for your rental activity, you can deduct his or her wages as a business expense. Similarly, you can deduct fees paid to independent contractors-such as plumbers or landscapers-who provide services. You will be required to issue to any individual independent contractor a 1099 if you pay them $600 or more during the year. You may also be required to collect 7% in New Jersey withholding tax and remit that to the New Jersey Division of Taxation.

8. Professional fees. Generally, you can deduct the fees paid to professionals-attorneys, accountants, property management companies, investment advisors and the like-to the extent that the costs are attributable to your rental activity.

9. Home-office expenses. If you use a room at home for administrative tasks related to the rental activity-and the activity has no other principal place of business-you can deduct expenses attributable to a home office. Thus, you can deduct a percentage of regular home expenses (utilities, insurance, etc.) and the full amount of direct expenses, such as a separate telephone line. The use of the home office must be regular and exclusive.

10. Casualty losses. Finally, if your rental property is damaged by a sudden event, including vandalism or theft, you may be able to claim a casualty loss for the damage suffered (less insurance reimbursements).