The Internal Revenue Service allows you to deduct many expenses connected with rental property in the categories of:
This means that you can deduct your insurance, interest on your mortgage, maintenance costs, and physical wear-and-tear on your property.
Depreciation may produce a nominal loss, which in turn you may deduct against other income. In other words, you may achieve net positive cash flow from the rental income minus expenses and still have a net loss for tax purposes. But be aware that depreciation also reduces the cost basis of a property for calculating capital gains when you sell your property.
In addition, the 2017 Tax Cuts and Jobs Act offers a number of tax benefits for landlords. If you own a flow-through entity (also known as a pass-through business) and operate it as a sole proprietorship, limited liability company, partnership, or S corporation, you now may deduct an amount equal to 20% of your net rental income—as long as your total taxable annual income from all sources after deductions is less than $157,500 for singles or $315,000 for married couples who file jointly.
If you rent your property seasonally, you may use it yourself for 14 days per year—or 10% of the number of days that you rent to others at a fair market price—and still be able to deduct your expenses.
In a 1031 exchange, you can sell a rental property and invest in another of “like kind” without paying capital gains taxes.
Passive Income Source
Perhaps the biggest benefit to owning rental property is that it’s a passive income source. This means that it is recurring income that requires relatively little effort to maintain. It can be an attractive option for people looking to make some money on the side, or even as additional financial security during retirement. Additionally, rental income may be taxed differently than employment income.
Of course, you’ll want to work out all the cash flows before investing in a rental property. In order to better ensure that being a landlord is more likely to be profitable for you, you’ll need to factor in all your expenses. Once you have an idea of your cash flow, you’ll want to assess whether the numbers suggest you’re likely to be able to make a consistent income on the property before purchasing.