The Basics of Real Estate Part 2
What are tax deductions of owning a rental property?
We not CPAs nor tax attorneys so you should consult with your tax professionals, however below are deductions we used to lower our tax obligation. By the way, we use a CPA to do our taxes, he is worth every penny and the best part is we learn something new every year.
- Advertising: “For Rent” signs and/or hiring a real estate agent to advertise online for you.
- Auto and Travel: We live far away from our rental properties so this is great deduction for us. If you are driving it is more beneficial to deduct this expense with the mileage option.
- Cleaning and Maintenance: These expenses typically occur when you have pest issues and when tenants move out of your property.
- Commissions: Paying tenant finder fees to a property manager or real estate agent.
- Insurance: Hazard, liability, and if applicable earthquake and flood insurances.
- Legal and other professional fees. Eviction proceeding, closing costs, etc…
- Management fees: Property management fees. Property managers typical charge 8%-10% of the gross rent.
- Mortgage interest: self-explanatory.
- Repairs: Clog toilets, leaky pipes, crack windows, etc…
- Supplies: lumber, faucets, air filters, etc…
- Taxes: Typically property taxes.
- Utilities: Typically this expense occurs during renovation and vacancy.
- Depreciation: The property can be depreciated over 27.5 years. Why 27.5 years, no normal person would know, it’s just a number studies have shown. The stove, air conditioner, furnace, window blinds, insulation, refrigerator allow to be depreciated over 7 years. The sewer or septic tanks are allowed to be depreciated over 15 years. We plan to replace roof on one of the properties so I am curious how many years you can depreciate a roof, my guess is 15 or 20 years.
We purchased our last property for $115,000. Our gross rental income is $1,100 or $13,200 a year. To get this place “ready to rent” we spent an additional $3,600 on replacing the HVAC, $10,000 to replace the sewer drain line/septic system, and $1000 on miscellaneous repairs. The sewer drain line/ septic system was a dumb mistake on my part as I didn’t hire a professional plumber to inspect the drain line prior to purchasing the property. This property is the least profitable out of all of our properties, but it’s still cash flow positive. Lesson learned. It won’t happen again!
Our 2015 Tax for this property is below.
Mortgage Interest = $4,322
Property Tax = $1,966
Insurance = $961
Travel = $748
Property Management = $1,100
Property Depreciation = $115,000/27.5 years = $4,181.81/year
HVAC Depreciation = $3,600/7 years = $514.28/year
Sewer/Septic System = $10,000/15 years = $666.67/year
Miscellaneous Repairs = $1000
Total Deductible Amount = $15,460
Gross Rental Income = $13,200
Our deductible amount is greater than our gross rental income. Therefore, we didn’t pay any taxes for this property. On paper it looks like we are lost $2,260. But most of these repairs are [hopefully] a one-time deal (within our ownership span that is). The bottom line is that the government is very friendly to home owners, especially passive real estate investors.