What you can and cannot use to ease what you owe the IRS
If you own rental real estate, you could generate a significant amount of income from your property(ies). But you may also be required to pay income taxes on that cash flow. The good news is that there are ways you may reduce – or eliminate – what you owe, which in turn, can give you more net spendable income in your pocket.
First, what exactly does the IRS consider rental income?
In addition to the actual rent payments you receive from your tenant(s), the IRS also considers the following items to be reportable income payments:
Advance rent (such as an up-front payment from the tenant of the last month’s rent; security deposits that go towards future rent payment and/or that you keep if the tenant moves out and leaves items that must be repaired, replaced, etc.)
Fees paid for the tenant terminating the lease early
Expenses that are deducted from the rent amount (such as when the tenant pays the utility bills and in return, you subtract the amount from their rent payment)
Income from additional services or amenities, such as coin operated laundry machines
While it may seem like the IRS can take a significant piece of the rental income pie, there are several tax deductions that are allowed. These can include:
Property tax payments
You may not, however, deduct the cost of property improvements, unless the property is improved for “a betterment or restoration or adaptation to a new or different use.”
Keeping track of all the income and expenses that are associated with rental property might seem overwhelming – especially if you own several homes or units. This is where having a property manager on board who takes care of this – along with all the other tasks of managing and maintaining investment real estate – is recommended.