Tax Deductions for Renting a Property for Less Than a Mortgage
- Although you can’t deduct the principal portion of your mortgage payments, you can write off the interest component. You can also write off insurance premiums for coverage of your rental property. This includes not only homeowners insurance, but landlord liability policies as well. Property taxes you pay to the county or the municipality where your rental property is located are also fully deductible.
- Although the IRS doesn’t allow you to take a deduction for the cost of your rental property when you purchase it, you can depreciate its value on your tax return over several years. This works by assigning a percentage of its value to each year, such as 25 percent the first year, 20 percent the second year and 15 percent the third year, until you have fully recouped its value. For example, if you purchase a condo for $100,000 that you rent out, you could potentially write off $25,000 of that the first year and continue the process yearly until you’ve accounted for the full $100,000 cost. Tax laws regarding depreciation are complicated, however, so if you want to depreciate your rental property, speak with a tax professional to find out what percentages and time frames apply to your specific situation.
- Generally, almost anything you spend on your rental property during the year is tax-deductible. Whether you place a newspaper ad to find a tenant or use a Realtor to market it, you can deduct those costs. Maintenance and repairs on the dwelling are tax-deductible and this includes a cleaning service you hire to put the place in rentable condition. As of the time of publication, you can write off $.51 cents for every mile you drive to manage your property. If you pay the utilities instead of assigning them to your tenant, they’re deductible. You can’t use improvements to the property as deductions, however. You must depreciate these expenses, just like the value of the property.
- It’s possible that after you add up all your available deductions, including the depreciation percentages, they’ll exceed the amount of rental income you took in during the year, especially if the rent you’re charging is less than your total mortgage payment. The difference between your costs and the rent you received is your loss or profit on the property for the year. If the number is negative, it's a loss. In some cases, you might be limited to using this loss only to offset the rental income you took in, or any other passive income you had from activities that did not involve your active participation. However, if you manage your rental property yourself rather than hire an agency to oversee it, you can deduct up to a $25,000 loss against your regular earned income as well. This figure decreases with the more money you earn, but will usually result in a helpful tax deduction if you rent your property for less than the mortgage and show a loss for the year.