Tax time is rarely a celebratory season. Many people dread it. Plenty of filers put off sending in their returns until the last moment of the last day of the April deadline. It's not all bad news, however, especially if you're a real estate investor. There are plenty of tax benefits available to you when you're renting out residential properties in Philadelphia and the surrounding areas. You already know that investing in rental properties is a great way to diversify your investment portfolio and earn recurring and consistent rental income. You also hold onto an asset that's appreciating in value over the long term. Another benefit to real estate investing that's often overlooked or understated is tax deductions. When you own rental property, you can take advantage of various tax advantages and write-offs, which can help lower your overall tax liability. We are not accounting professionals, nor are we tax attorneys; however, we've been managing rental properties in and around Philadelphia for many years, and we have a lot of insight to share about how to leverage your investments at tax time. Let's take a look at the tax deductions available for Philadelphia rental property owners.
Mortgage Interest Deduction on Investment Properties
Unless you paid in cash for your investment property or you financed it in some other creative way, you likely have a mortgage on that rental home. That's an expense that you're likely eager to pay down, but there is a silver lining to your mortgage payments. As a rental property owner, you can deduct the interest paid on that mortgage. This deduction can significantly reduce your tax liability, especially if you have a large mortgage. Keep in mind that you can only deduct the interest on the mortgage, not the principal.
Property Taxes Deduction for Philadelphia Rental Property Owners
You pay local property taxes on each investment property you own. Luckily, you can deduct those property taxes on your federal return when we're talking about a property that you rent out to tenants. This deduction will reduce your income and bring down your tax liability.
Deducting the Cost of Repairs and Maintenance
As a rental property owner, you are responsible for maintaining and repairing your property. One of your most basic responsibilities is to provide a property that's safe and habitable. The amount you spend on repairs will depend on a number of factors, including the age of your rental home and its overall condition. While no landlord ever enjoys paying those maintenance invoices, the money you spend can be helpful at tax time. The good news is that you can deduct the expenses related to repairs and maintenance from your rental income. This includes expenses for things like:
- Repairing plumbing leaks
- Painting
- Repairing appliances
- Fixing broken doors, windows, drawers, closets, etc.
Keep in mind that you cannot deduct expenses for improvements or upgrades that increase the value of your property.
Depreciation Deduction
Depreciation is the process of deducting the cost of your rental property over several years. This deduction can be a little complex, but it basically allows you to write off the cost of your property and related assets over time. Depreciation is based on the value of the property, and the IRS allows you to deduct it annually over a period of 27.5 years, for residential rentals. Depreciation can significantly reduce your tax liability, so it's important to work with a tax professional to ensure you are taking advantage of this deduction correctly.
Travel Expenses Deduction
If you travel to and from your rental property for maintenance and repair purposes or to manage showings while the home is vacant, you can deduct those expenses on your tax return. This includes the cost of gas, airfare, and hotel stays. Keep in mind that you can only deduct expenses that are directly related to your rental property, not personal expenses.
Deducting Philadelphia Property Management Fees
If you're working with a professional property manager, those management fees and leasing fees you pay are tax-deductible. You can also write off most commissions that are paid when you're leasing your home to tenants. This makes property management worth it; not only will you earn more and spend less on your management services, but they'll also basically pay for themselves when you're able to deduct what you spend on your taxes.
Understanding Capital Gains
There are tax implications when you sell your rental property. The capital gains tax will apply to any asset that you sell for more than its original asking price. If you hold your investment property for more than a year, it becomes a long-term capital gains tax. While this is a liability for rental property owners who are interested in selling an asset, there is a good way to delay the payment of this tax. You can conduct a 1031 exchange, in which you sell one rental property and use the proceeds to invest in another rental property. There are some strict timelines and requirements around a 1031 exchange, so make sure you understand exactly what you need to do before you engage in something like this. You'll need a qualified intermediary as well as good tax advice. Owning a rental property can be a lucrative investment, but it's essential to understand your tax obligations as a landlord. Taking advantage of the tax deductions available to Philadelphia rental property owners can help you reduce your tax liability and keep more money in your pocket. We always recommend that you work with a tax professional to ensure you are maximizing your deductions while staying compliant with tax laws. By taking advantage of these deductions, you can make the most of your investment and achieve long-term financial stability. We'd be happy to tell you more about how to leverage the tax benefits available to Philadelphia rental property investors. Please contact us at Innovate Realty. We work with investors and their properties in the greater Philadelphia metro area as well as the northeast part of the city and in local areas including Bucks, Montgomery, Delaware, Burlington, and Camden counties.
