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Tax Deductions: Rentals

Experts agree that the housing market is beginning to once again pick up. Investors are plunging head first, purchasing foreclosures and fixer-uppers in anticipation of the housing market coming back to life. Rentals can be exceptionally profitable for investors, but it’s important to remember they are not maintenance free and require hard work and long-term commitment.

While most real estate investors understand the IRS tax code pertaining to writing off mortgage interest, many investors wonder what other expenses qualify for write-offs based on rental-related expenses.

When someone borrows money for a mortgage, it is considered to be income per the IRS. As the mortgage is repaid, this is considered a taxable expense. This simply means if a business borrows funds for business-related expenses, then those expenses may be deductible, provided they are paid from the borrower’s proceeds.

Once a property loan is repaid, then the tax consequences associated with the loan are also forgiven. If the loan ends up in default, then the debt income forgiveness comes into consideration. A primary example is that if someone were to default on his/her loan, then the legal right associated with claiming those deductions is voided, as the loan was not paid. Someone cannot accept a mortgage interest write-off if the loan has been defaulted on. Additionally, property owners must recognize the income, if it is forgiven.

Based on IRS tax guidelines, rental properties can be depreciated. The loan’s principle payments can be partially recovered by claiming property depreciation. For example, if a landlord borrows $275,000 for a rental property at a 100-percent loan-to-value rate, the property can be depreciated over a 27.5-year period. During that time period, depreciation can be claimed at approximately $10,000 per year. This can only be claimed for as long as the property owner owns the property. The $10,000 depreciation expenses, in addition to the mortgage interest paid, should be equivalent to the tax deductions that are more than the simple principle repayment plan.

Landlords and property owners are advised to contact a tax attorney or accountant to review their individual situations. Rental properties can be complex and having insight into the complicated IRS tax codes is financially beneficial and helpful for investment owners.

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