If you own a rental property, a necessary step in tax preparation is identifying your rental property expenses. These expenses are those expenses you can deduct to help offset the rental income you include in your gross income. You generally deduct your rental expenses in the year you pay them. For more information regarding reportable rental income, please see the StrataTax article “What is Rental Property Income”. Generally, rental property expenses, such as maintenance, insurance, taxes, and interest, can be deducted from your rental income. Below are some additional expenses that may be deductible.
Pre-Rental Expenses. You can deduct your ordinary and necessary expenses for managing, conserving, or maintaining rental property from the time you make it available for rent.
Vacant Rental Property. If you hold property for rental purposes, you may be able to deduct your ordinary and necessary expenses (including depreciation) for managing, conserving, or maintaining the property while the property is vacant. These will be considered rental property expenses. However, you cannot deduct any loss of rental income for the period the property is vacant.
Uncollected Rent. If you are a cash basis taxpayer, do not deduct uncollected rent. Because you do not include it in your income, you cannot deduct it. If you use an accrual method, you report income when you earn it. If you are unable to collect the rent, you may be able to deduct it as a business bad debt. For more information regarding bad debts, please refer to the StrataTax article “Deduct Your Business Bad Debts”.
Repairs. You can deduct the cost of repairs to your rental property. A repair keeps your property in good operating condition. It does not materially add to the value of your property or substantially prolong its life. If you make repairs as part of an extensive remodeling or restoration of your property, the whole job is an improvement. You cannot deduct the cost of improvements. An improvement adds to the value of property, prolongs its useful life, or adapts it to new uses. The cost of improvements must be capitalized.
Insurance Premiums Paid in Advance. If you pay an insurance premium for more than one year in advance, for each year of coverage you can deduct the part of the premium payment that will apply to that year. You cannot deduct the total premium in the year you pay it.
Local Transportation Expenses. You can deduct your ordinary and necessary local transportation expenses if you incur them to collect rental income or to manage, conserve, or maintain your rental property. Generally, if you use your personal vehicle, you can deduct the expenses using either the standard mileage rate or actual expenses.
Travel Expenses. You can deduct the ordinary and necessary expenses of traveling away from home if the primary purpose of the trip was to collect rental income or to manage, conserve, or maintain your rental property. You must properly allocate your expenses between rental and nonrental activities. You cannot deduct the cost of traveling away from home if the primary purpose of the trip was to improve your property. You recover the cost of improvements by taking depreciation.
Tax Preparation. You can deduct, as a rental expense, the part of tax preparation fees you paid to prepare Schedule E, Form 1040, Part I.
Your tax preparer can provide you with more information regarding the treatment of rental expenses on your income tax return. StrataTax, a San Diego consulting and tax services firm, is available year-round to assist you with income tax preparation and tax planning. Call us at (858) 225-7720 to setup your free initial consultation or visit us at www.StrataTax.com for more information.
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