Owning a rental property while it may not provide financial freedom in the first year of ownership does come with tax benefits that are better than even those you get with the house you may be living in. The last thing a landlord wants to do is end up with a taxable income. And luckily for the landlord, that is pretty hard to do when you consider everything that can be deducted. Virtually every penny spent towards the property can be deducted from property taxes to paperclips. To start, if you own a rental in another city that you visit from time to time, requiring travel, those travel expenses can be deducted. If you are considering investing in real estate maybe the tax benefits of owning rental property will convince you take the plunge.
Do you have a property management company for your rental property? If so, or if you plan to eventually hand off the responsibility, those fees are also deductible. If you’ve been avoiding hiring a property manager due to the cost, this may encourage you to do so. Taking the burden of property management off of your plate can free up a lot of your time for other income generating activities, and further offset the fees of property management.
Generally speaking tax laws favor landlords to a large degree. For example, similar to homeowners, mortgage interest can be deducted. If cash is taken out of the property via a refinance, the increased mortgage interest, and a portion of the loan origination fees and points may also be deducted. Though there has been talk about eliminating the mortgage interest deduction, landlords would not be affected since the deduction for an investment property is considered a business expense.
Landlords may also deduct insurance, maintenance and utilities from their income, which homeowners cannot. The allowed deduction which leaves one scratching their head and landlords laughing all the way to the bank is the depreciation deduction. This tax law, in favor of landlords, assumes a depreciation of their asset over time, similar to a piece of equipment, which in turn is deductible. This wouldn’t be unusual if property suffered a typical depreciation over time but as we know the opposite is true. Property instead is more likely to appreciate by a considerable amount over time.