Utility Deductions If you pay any utilities for the rental property, you can deduct what you pay. While your tenants probably pay the utilities, you may be liable for expenses incurred while the unit is vacant, municipal water or garbage bills, or other costs. It’s all deductible and offsets rental income. Good record keeping is key when it comes to claiming your rental property tax deductions and providing evidence should you receive an audit request. Always maintain copies of receipts, bills, travel expenses, mileage logs and other records that show what you spent on maintaining your rental properties. Depreciation Deduction One of the biggest landlord tax benefits is the depreciation deduction landlords can take for their properties. The depreciation deduction reflects the natural breakdown of your property over time. For residential properties, the depreciation period is 27.5 years. Depreciation affects the home only, not the land on which it sits. To figure out how much you’ll earn in depreciation each year, divide your home’s assessed value by 27.5. If your home’s assessed value is $300,000, you can claim $10,909 per year in depreciation. This offsets rental income, effectively lowering your tax liability. See more below on how to accelerate your deductions below. Cost Segregation A Cost Segregation Study analyzes all the components of your property and assigns the costs associated with them to their correct, shorter depreciation lives. Instead of depreciating the entire property over 27.5 years, your accountant will now be able to depreciate significant portions over 5, 7 and 15 years. The balance, the structural components of your building, will continue to be depreciated over 27.5 years. Cost segregation is not cheap, but the benefits can be astounding. How do you know if a Cost Segregation Study is worth it? ✓ Did you pay over $750,000 for your building? ✓ Have you owned the building for less than 15 years? ✓ Do you plan on holding it for at least 2 more years? ✓ Do you have, or shortly plan to have, a tax liability? If you answered “Yes” to the questions above, and you are not using cost segregation, you are probably overpaying your taxes.
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