Landlords are awarded tax advantages as owners of investment real estate properties. Repair costs, utility bills, real estate taxes and vehicle mileage are some of the expenses a landlord can deduct to offset rental income. Often, the largest deduction a landlord takes is the quantity of interest paid to a lender on a mortgage put on the rental property. According to the Nolo legal site, rental property provides more tax advantages than almost any other investment.
According to the Internal Revenue Service, or IRS, rental income is defined as any payments received for the use or occupation of property. This includes advance payment of lease, rental cancellation fees, expenses paid by a tenant, rental options and the fair market value of any property or services received. Rental income must be reported on a home owner’s tax return and also within the quantity of gross income received for the year.
To offset the income received from tenants’ rents, landlords are permitted to subtract several common expenses the year they are incurred. The IRS lets the amount of interest toward a mortgage to be deducted the same year it’s paid. The expenses paid to get a mortgage are also allowable, though they must be distributed across the life of the loan.
As with many tax deductions, certain exceptions apply to mortgage interest qualifications. Prepaid interest can only be deducted the year it’s due, and any interest that’s refunded to the debtor can’t be deducted. Any interest or a reduction payable from the loan proceeds also don’t qualify as a deductible expense. The IRS’s criteria for determining whether interest is allowable as a cost of doing business include: being legally accountable for the debt, the debt is meant to be repaid, which a legitimate debtor-creditor relationship exists between the borrower and lender.
To determine the total amount of mortgage interest that’s deductible, check your monthly mortgage bills and include the sums paid for the year. This total should correspond to the amount listed on the Form 1098 received from a lender. This form lists the deductible quantity of interest and should be used when submitting a tax return.
Along with the interest paid for the entire year on a mortgage, landlords can deduct the costs of obtaining the mortgage. Whether the home was recently bought or the mortgage is refinanced, loan origination fees, points and other costs may be amortized over the life of the loan. This causes a smaller deduction than is permitted for interest but is applicable for several years of tax returns. When a mortgage is paid off first and is subject to a prepayment penalty, the penalty is deductible as interest.